All of this shows that widening economic and policy divergence is one of the most important “top-down” issues for investors in stocks and other asset classes. For it to prove consistent with further gains in world stock markets and other risk assets, two developments are necessary to enable a process of convergence from below -- that is stronger growth in the rest of the world. And both fall far outside the Fed’s sphere of influence. Europe and Japan would have to take more comprehensive policy measures to bolster their actual and potential growth rates; and emerging economies need to be able to navigate a further tightening in their external financial conditions.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”