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Watch out for “headwinds” from inflation: After a market correction of 10 to 20%, it might take a 12 months to interrupt even, warns economist Mark Zandi

Moody's Analytics Mark Zandi has a message for investors: prepare for a significant market correction.

The company's chief economist expects a more restrictive Federal Reserve to trigger a 10-20% decline.

And in contrast to the sharp falls in recent years, Zandi assumes that a quick recovery will not be in sight, especially because the market is highly valued. He estimates it could take a year to break even.

"The headwind is building up for the stock market," Zandi told CNBC's "Trading Nation" on Friday. "The Federal Reserve has to switch here because the economy is so strong."

He suggests that the correction may already be underway as investors are starting to get scared.

The Dow just posted its biggest weekly loss since October 2020, falling 3.45%. The broader S&P 500 had its worst week since late February. Tech-heavy Nasdaq also had a week of losses, but it is only 1.28% below its all-time high.

Despite his market warning, Zandi believes the economy will steer clear of a recession, as the downturn is due to excessive risk asset prices rather than a serious fundamental problem.

"The economy will be in full swing," he said. "Unemployment will be low. Wage growth will be strong."

Zandi has been hitting the inflation alarm for months.

On "Trading Nation" in early March, Zandi claimed that inflation was "way ahead" and that investors were not fully aware of the risks. According to Zandi, it's still an issue that affects stock market and bond investors. Zandi sees little chance that the benchmark yield on ten-year Treasury Notes will decline further.

"I wouldn't expect rates to stay at 1.5% very long given the current situation," he added.

Stocks and bonds aren't the only risky assets that get his attention. Zandi also sees more problems with the sell-offs of commodities and cryptocurrencies. He is also concerned about the sustainability of a strong real estate market in the face of higher mortgage rates.

"Inflation will be higher than it was before the pandemic," said Zandi. "The Fed has been fighting to raise inflation for at least a quarter of a century and I think they will be able to do it."

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