Stagflation headlines abound: How likely is it and how can traders prepare?
Matt Weller, CFA, CMT October 14, 2021 3:08 PM
If we do enter a stagflationary environment, there may be relatively few investments that perform well - see what they are and what to avoid!
For the uninitiated, “stagflation” is a term that was coined in the 1970s to refer to an economic environment characterized by STAGnant growth and elevated inflation. Back then, central banks were enacting an easy money policy at the same time that surging energy prices created “cost-push” inflation for individuals and businesses, weighing on economic growth across the globe.
Sound (at least somewhat) familiar?
While the global economy hasn’t experienced a meaningful bout of stagflation in the last 40 years, some analysts are starting to think that exact scenario may be emerging again, with the combination of easy monetary policy and a surge in energy prices leading to persistent inflation and potentially slowing growth. Indeed, according to a recent Deutsche Bank AG survey, a “fairly strong consensus” of market professionals believe some kind of stagflation is more likely than not. As my colleague Joe Perry outlined yesterday, the above-expectation 5.4% y/y inflation reading signals that “perhaps inflation may not be as transitory as the Fed had originally thought.”
Of course, to put the recent developments into context, price increases in most developed countries are nowhere near the double-digit inflation rates that characterized much of the 1970s, and global economic growth is still running relatively hot as we continue to recover from pandemic-driven lockdowns; in other words, stagflation is far from inevitable or even necessarily likely at this point, but it is still a risk for readers to have on their radars.
So what markets benefit from stagflation?
If we do enter a stagflationary environment, there may be relatively few investments that perform well:
- Bonds tend to do particularly poorly, with the insidious impact of persistent inflation sapping away any “real” (after inflation) returns from the asset class.
- Many stocks could also struggle, especially some of the more speculative, fast-growing, currently-unprofitable names that have done so well in recent years.
- That said, certain stocks with inelastic demand and strong pricing power (think consumer staples or health care names for example) may outperform as they can pass along any price increases to their consumers.
- Commodities can be hit or miss, but ones linked to inflation (notably gold and silver) could provide protection from broad price increases and benefit from potential safe haven demand.
- Finally, real estate and REITs tend to perform decently given landlords’ ability to adjust rent higher and fairly inelastic demand for homes and buildings.
Despite the recent uptick headlines about stagflation, it still is not the most likely scenario for the global economy at the moment. That said, any successful trader will tell you that preparing for multiple scenarios in advance is the best way to be prepared regardless of what the future brings. As always, we’ll continue to monitor economic data and other developments to keep our readers as informed and prepared as possible for whatever the future brings!
How to trade with FOREX.com
Follow these easy steps to start trading with FOREX.com today:
- Open a Forex.com account, or log-in if you’re already a customer.
- Search for the pair you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.