The Risk Of ‘70s-Style Stagflation Is Back, And There Aren’t Many Places To Hide

The Risk Of ‘70s-Style Stagflation Is Back, And There Aren’t Many Places To Hide
Stéphane Renevier, CFA

about 2 years ago1 min

Russia’s invasion of Ukraine has got investors worried that they could soon be facing the worst economic environment for risky assets like stocks: stagflation.

Stagflation is the unlikely combination of low growth and high inflation (which normally move in tandem), and hurts companies via both slower revenue growth and contracting profit margins. Stagflation is also a nightmare scenario for central banks and governments, which can’t use monetary easing and fiscal stimuluses without exacerbating inflationary pressures.

The last time investors faced a significant stagflationary shock was in 1973, when an oil embargo by members of the oil-producing alliance OPEC led to a sharp rally in the black gold’s price, which compounded already high inflation pressures and choked economic growth. That led to an economic recession and a significant stock market correction.

With the conflict in Ukraine sending energy prices to new highs and threatening economic growth, today’s environment doesn’t seem too dissimilar. So if you think we’re at risk of a repeat of 1973, commodities, real estate, cash and treasury inflation-protected securities (TIPS) might be your best bets, as they’re the only assets to perform positively back then.

On the other hand, you’ll want to avoid stocks – particularly those of tech companies and consumer discretionaries, which could be hit the hardest by lower growth expectations and squeezed margins like they were in the ‘70s. And don’t count on bonds to save the day: lower growth tends to be a good environment for bonds, but higher inflation isn’t.

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