Stagflation Is The Biggest Risk for the U.S. Economy
For the next few months and even the next few quarters, the biggest risk that the U.S. economy faces could be stagflation. If you’re an investor who’s looking for opportunities, knowing how stagflation works could help you steer your way through the financial markets better.
Mark my words: if there’s one thing stagflation means, it’s tricky investing conditions.
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Let’s go to the basics first.
What is stagflation? In the simplest words, it’s when there’s slow economic growth, high unemployment, and high inflation at the same time.
Has the U.S. economy ever experienced stagflation? Yes, it happened back in the 1970s.
3 Reasons Stagflation Could Be Ahead in the U.S. Economy
Now, why could the U.S. economy see this economic phenomenon again? There are essentially three big reasons why stagflation could become a reality.
First, inflation is already higher than normal. According to the most recent official figures, prices have increased by five percent in the U.S. year-over-year. Sadly, it’s possible that we’ll see prices jump a little more. Commodity prices are still elevated, prices of services are jumping, home prices are soaring, etc.
But hasn’t the unemployment situation in the U.S. gotten better? Surely, if you look on the surface, the unemployment rate in the U.S. has really come down. Over the past few months, there’s been robust job growth. However, one has to ask: If and when the government subsidies end, what will happen to the employment situation?
Second, as for economic activity, it’s hot at the moment. But that’s not going to be the case for too long. Even according to the Federal Reserve’s estimates, the 2022 U.S. gross domestic product (GDP) will be nowhere close to what it’s expected to be in 2021. There’s a massive deceleration expected.
Third, you have to keep in mind that we got our robust economy on the back of robust stimulus. The Federal Reserve has printed record amounts of money and the U.S. government has spent immense sums. Of course, it will give the illusion that everything is rosy. But what will happen when the stimulus isn’t as effective anymore?
All in all, the case for stagflation coming to the U.S. economy is very strong.
Ways to Navigate Through Markets Experiencing Stagflation
Dear reader, as I said earlier, when there’s stagflation, investing becomes tricky.
Here are some more basics. Inflation is the bond market’s biggest enemy. Bonds sell off in times of high inflation. Stocks go higher on economic growth. If growth slows down, stocks get hurt.
See the problem? When there’s stagflation, if your investment portfolio consists of bonds and index funds, it may not do very well. Stocks and bonds are both at risk during times of stagflation.
So, The big question is: How does one navigate in times of stagflation? In simple words, get selective.
There are certain stocks that could be decent inflation hedges. These are stocks of companies that produce or sell products that everyone needs and doesn’t really care about the price. These kinds of stocks could preserve wealth in times of stagflation because the companies can raise their prices without their sales being terribly impacted.
As for bonds, investors might want to be careful. Bonds could be volatile and take a heavy toll on an investment portfolio.
