Analysis: The 1970s again? Stagflation debate divides Wall Street
NEW YORK, Oct.27 (Reuters) – Phil Orlando hasn’t heard so many people talk about stagflation since he was a financial reporter in the late 1970s, when oil prices were soaring and inflation was soaring. more than double its current level.
Now chief stock market strategist at Federated Hermes, Orlando says stagflation is about to make a comeback and is building up in the stocks of companies that can thrive during times of high inflation and slower economic growth .
“The surge in inflation is not proving to be transitory as the Fed and the Biden administration have told us,” he said. “It’s sticky and sustained when we’re past peak growth. It’s stagflation.”
Consumer prices rose at an annual rate of 5.4% last month, on track for their highest annual gain since 1990, an increase that analysts have pinned on everything from soaring commodity prices first to some $ 5.3 trillion in U.S. fiscal stimulus adopted since the start of the pandemic. Meanwhile, US economic growth in the third quarter is expected to drop to 2.7% from 6.7% in the previous quarter. .USGDPA = ECI find out more
Most economists believe stagflation is far from inevitable, and the Federal Reserve has said the price hike will be temporary. The S&P 500 is up 22.1% this year and is near record highs. Read more
Still, many investors are on the alert, wary of the corrosive effect past periods of stagflation have had on asset prices.
Google’s searches for “stagflation” this month are on course to reach their highest level since 2008, while Goldman Sachs (GS.N) wrote that the term is now “the most common word in conversation. with customers”. The number of fund managers expecting stagflation rose 14 percentage points in October to its highest level since 2012, a survey by BoFA Global Research (BAC.N) showed.
“It is clear that the deceleration of our economy is shocking and portends stagflation,” said Louis Navellier, chief investment officer of Navellier & Associates. “We’re going to tighten up all of our wallets because we see ourselves going into a tunnel where [the equity market] becomes more nervous and narrow. “
Past episodes of stagflation have weighed on equities. The S&P 500 has fallen 2.1% on median in quarters marked by stagflation over the past 60 years, while rising 2.5% on average in all other quarters, according to Goldman Sachs.
Bonds also struggled during the last major period of stagflation, which began in the late 1960s. Soaring oil prices, rising unemployment and loose monetary policy pushed the price index up. consumption to a peak of 13.5% in 1980, prompting the Fed to raise interest rates to nearly 20% that year.
According to data compiled by New York University professor Aswath Damodaran, the 10-year US Treasury benchmark fell in nine of the 11 years to 1982. Inflation is eroding the purchasing power of future cash flow from bonds.
Orlando, of Federated Hermes, owns shares of companies that may pass the rising costs on to consumers, including energy and industrial companies. Navellier has focused on big box retailers who own their supply chains, such as Target Inc (TGT.N).
Many on Wall Street reject comparisons to the 1970s, arguing that the causes of the current inflation spurt are either exaggerated or likely to fade away.
“We think we’re at the peak of concerns about stagflation,” said Scott Kimball, co-head of U.S. fixed income at BMO Asset Management, who estimates most of the spending a bill Potential infrastructure – a major concern for the inflation hawks – are long term and would not have an immediate economic effect.
Jean Boivin, director of the BlackRock Investment Institute, expects growth to accelerate as supplies become more readily available and is positioning himself for Treasury yields to rise.
“The inflationary pressures we expected are here,” he wrote in a recent report. However, “this is not stagflation, and we remain pro-risk.”
UBS analysts said that in addition to the rise in oil prices, stagflation in the 1970s was due to factors that are less significant today, including government price controls that restricted oil ‘offer.
A wild card is whether the threat of rising inflation will force the Federal Reserve to take a more hawkish stance, as the central bank prepares to begin unwinding its government bond buying program of $ 120 billion per month. Signs of a faster slowdown and more aggressive interest rate hikes could weigh on equities.[nL1N2QV0O8]
“If next year you’re 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, portfolio manager of global bonds at Janus.
Reporting by David Randall; Editing by Ira Iosebashvili and Steve Orlofsky
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