The 1970s are back in style! (Well, the economics are, at least).
The data this past week has pretty much confirmed what we’ve suspected for some time: higher inflation and slow growth are the new norm. This is called stagflation, and it hasn’t been a problem since the 1970s.
The Fed’s meeting last week really drove the point home: a unanimous decision to raise rates, with Fed chairman Warsh suggesting that inflation won’t be under control until 2029, AND 16 of the 18 govenors expecting at least one more rate hike by the end of the year.
Bottom line: the Fed is worried about inflation and rates are marching higher.
Here’s what this means for your investments (also see our Chart of the Week). Higher rates means stocks get less expensive, and this hits the most expensive names the hardest. Investors are much less patient with no return, and companies need to show profit growth. In other words: this is a stock-picker’s market.
Commodities usually do better in a higher inflation environment, assuming a recession doesn’t materialize.
Long-term bonds tend to perform poorly in a rising rate environment.
Overall, this is the time to spend time re-tooling your portfolio for a different environment than what we have seen since 2012. For more, check out our Chart of the Week.
Chart of the Week
Luckily, we don’t have to fly blind in our expectations of where to place capital in a stagflationary environment. Looking back at the returns of various asset classes from 1973 – 1982, we can estimate which investments might outperform others. To be clear, I do not expect to see the extreme environment on ’73 – ’82, so the numbers themselves are probably not too helpful, it is the ranking that is important here.
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