Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Analysis-The 1970s all over again? Stagflation debate splits Wall St

Economy Oct 27, 2021 09:46AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: U.S. dollar bills are seen on a light table at the Bureau of Engraving and Printing in Washington, November 14, 2014. REUTERS/Gary Cameron 2/2

By David Randall

NEW YORK (Reuters) - Phil Orlando has not heard this many people mentioning stagflation since he was a financial journalist in the late 1970s, when oil prices were soaring and inflation stood at more than double its current level.

Now the chief equity market strategist at Federated Hermes (NYSE:FHI), Orlando says stagflation is poised to make a comeback and is piling into shares of companies that can thrive during periods of high inflation and slower economic growth.

"The surge in inflation is not proving to be transitory like the Fed and Biden administration have been telling us,” he said. “It's sticky and sustained when we're past peak growth. That's stagflation."

Consumer prices rose at an annual pace of 5.4% last month, on track for their highest annual gain since 1990, a surge that analysts have pinned on everything from soaring commodity prices to some $5.3 trillion in U.S. fiscal stimulus passed since the start of the pandemic. Meanwhile, third quarter U.S. economic growth is expected to fall to 2.7%, from the prior quarter's 6.7% rate. [.USGDPA=ECI]

Most economists believe stagflation is far from inevitable, and the Federal Reserve has said rising prices will prove temporary. The S&P 500 is up 22.1% this year and stands near record highs.

(For graphic on stagflation Worries Hover Over U.S. Economy Stagflation Worries Hover Over U.S. Economy - https://graphics.reuters.com/USA-MARKETS/STAGFLATION/gdvzyweogpw/chart.png)

Yet many investors are on alert, wary of the corrosive effect that past periods of stagflation have had on asset prices.

Google (NASDAQ:GOOGL) searches for “stagflation” this month are on track to hit their highest level since 2008, while Goldman Sachs (NYSE:GS) wrote the term is now “the most common word in client conversations.” The number of fund managers expecting stagflation rose by 14 percentage points in October to the highest level since 2012, a survey from BoFA Global Research showed.

"Clearly the deceleration in our economy is shocking and that points to stagflation,” said Louis Navellier, chief investment officer for Navellier & Associates. "We are going to tighten up all our portfolios because we see us going into a tunnel where [the equity market] gets more nervous and narrow."

Past episodes of stagflation have weighed on stocks. The S&P 500 fell a median of 2.1% during quarters marked by stagflation over the last 60 years, while rising a median 2.5% during all other quarters, according to Goldman Sachs.

Bonds also struggled during the last major stagflationary period, which began in the late 1960s. Spiking oil prices, rising unemployment and loose monetary policy pushed the core consumer price index up to a high of 13.5% in 1980, prompting the Fed to raise interest rates to nearly 20% that year.

The benchmark 10-year U.S. Treasury fell in nine of the 11 years leading up to 1982, according to data compiled by Aswath Damodaran, a professor at New York University. Inflation erodes the purchasing power of bonds’ future cash flows.

Orlando, of Federated Hermes, is holding shares of companies that can pass on rising costs to consumers, including energy and industrial firms. Navellier has focused on big-box retailers that own their supply chains, like Target (NYSE:TGT) Inc.

DIVIDED OUTLOOK

Many on Wall Street reject comparisons to the 1970s, arguing that the causes of the current bout of inflation are either overblown or likely to fade.

"We think we're at the peak of stagflation concerns," said Scott Kimball, co-head of U.S. fixed income at BMO Asset Management, who believes most of the spending in a potential infrastructure bill - a key worry for inflation hawks - is long term and would not have an immediate economic effect.

Jean Boivin, head of the BlackRock (NYSE:BLK) Investment Institute, expects growth will accelerate as supplies become more readily available and is positioned for Treasury yields to move higher.

“The inflation pressures we expected are here,” he wrote in a recent report. However, “this is not stagflation, and we remain pro-risk.”

Analysts at UBS said that in addition to higher oil prices, stagflation in the 1970s was driven by factors that are less meaningful today, including government price controls that constricted supply.

One wild card is whether the threat of rising inflation will force the Federal Reserve into a more hawkish stance, as the central bank readies to begin unwinding its $120 billion a month government bond buying program. Signs of a faster taper and more aggressive interest rate increases could weigh on stocks.

"If next year you are still sitting with inflation levels like we are and growth hasn't picked up, then you have to think the Fed will act," said Jason England, global bonds portfolio manager at Janus.

Analysis-The 1970s all over again? Stagflation debate splits Wall St
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email