Are we about to get walloped by “stagflation”? We have not seen this combination of high inflation, high unemployment and little or no economic growth since the 1970s. The Russian invasion has created supply shocks, reducing supplies of oil, natural gas and other commodities. Example: Russia and Ukraine account for nearly 30% of the world’s wheat trade. That will keep the highest inflation in four decades elevated. And Fed actions to curb inflation—hiking interest rates and/or wage and price controls—could slam the brakes on economic growth and exacerbate unemployment. Stagflation may not materialize if supply-chain disruptions normalize and inflation moderates—but if it does, stocks will struggle and bonds won’t protect your principal.
Your stagflation playbook…
Favor stocks of profitable businesses that offer essential goods and services and can raise prices even if economic growth is stagnant—think energy and consumer-staple companies.
Get exposure to gold and commodities. Gold tends to hold its value in inflationary times and benefits from investors fleeing stocks and commodities whose prices react to supply-and-demand shocks. Recommended now…
iShares Gold Trust ETF (IAU) tracks the price of gold.
DWS RREEF Real Assets Fund (AAASX) owns hedges against stag-flation including commodities and gold.
Shorten and reduce bond exposure. Bonds are no safe haven from a volatile stock market, especially long-term bonds. Prices will remain depressed, and yields won’t defend your purchasing power.