Stagflation is inflation coupled with a period of decreased economic output. Currently, many investors are worried that we have already entered into a period of stagflation, with persistent surging prices and the labor market still struggling to fully recover. Supply chain blockages continue to put a strain on full economic liftoff while Delta variant concerns have added pressure to an already conflicted workforce.
Analyst and consumer perspectives vary as to what degree stagflation is a concern.
Economist Carl Weinberg feels that inflation expectations are still being driven by a “temporary spate of supply issues” and there is no sign of continued upward pressure on prices, in a conversation with CNBC.
“If ‘stagflation’ means ‘the 1970s,’ a time of wage-price spirals and high unemployment, this clearly isn’t it,” wrote Morgan Stanley strategist Andrew Sheets.
Consumers, however, are not so convinced.
A new Deutsche Bank survey saw three-quarters of respondents worried that rising inflation/bond yields could become the largest factor negatively impacting market stability, according to Fox News.
One of the most tried-and-true strategies to battling inflation is to “time in” the market — or keep investments with the long-term in mind and not allowing jitters to drive you to sell everything off. Stagflation, historically, has been temporary, which means acting on long-term investments because of temporary conditions will only damage a portfolio in the long run.
Ryan P. Johnson, CFA, CFP, Director of Portfolio Management & Research for Buckingham Advisors says the best thing to do is focus on owning stocks of companies that have pricing power, “which often comes from innovation” he says. Technology companies that focus on new and popular creation, in our time, for example, renewable energy and infrastructure, are a good example of this. He also recommends to “avoid long-term bonds that could lock in low yields” and to “focus on owning real assets that are cash flow positive” such as mortgages, mortgage companies and equipment. He warns against commodities, advising to “treat commodities exposure as a trade and not as a long-term investment.”
If you are one of the millions of Americans who got into investing for the first time this year, now is a good time to reassess your portfolio. If investing is new to you and you rode the popular stock wave of 2020 into 2021, you should expect a period of volatility with potential corrections coming off 2020 highs.
However, if you believe in the longevity of your investments, the best thing to do is to stick it out. The greatest investments are those that are designed to withstand peaks and troughs throughout the several economic cycles. If you don’t have that much faith in them, even if they made you a pretty penny in the last year, then now may be the time to part ways with the once-profitable options.
Jerry Braakman, chief investment officer of First American Trust told Bloomberg, “We’re going to have a decelerating, still-growing economy and inflation is going to stick around…so we get into that stagflation.” In that scenario, REITs and technology still tend to do well and gold starts to look attractive, he added.
So if you’re looking for a reshuffle of any kind, real estate investment trusts and technology stocks tend to perform well during periods of stagflation, as they are both sectors noted for long-term investment power. Additionally, gold has long been utilized as a safe-haven investment as well, as it retains its value even in times of crisis.
See: Bringing Home the Bacon Is 28% More Expensive — Unrelenting Inflation Lifts Prices to a 40-Year HighFind: Powell ‘Frustrated’ That COVID-19 Vaccines and Supply Shortages Likely To Push Inflation Into 2022
Christopher Jones, financial advisor for Edward Jones, recommends consumer staples such as cosmetics, toilet paper companies and food distributors since they “typically outperform consumer discretionary in rising inflationary periods along with utilities and energy, as there is a generally positive correlation between oil prices and inflation.”
This article was updated to add commentary from Ryan P. Johnson and Christopher Jones.
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