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


© Reuters. FILEPHOTO: U.S. Dollar bills can be seen at the Bureau of Engraving and Printing (Washington, November 14th 2014). REUTERS/Gary Cameron

By David Randall

NEW YORK, (Reuters) – Phil Orlando is not familiar with the term stagflation. He was a financial journalist back in 1970, at a time when oil prices were soaring. Inflation stood at over twice its current level.

Orlando is now the Federated Hermes’ chief equity market strategist.

“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. This is called stagflation.

Last month’s annual rise in consumer prices was 5.4%. It is on pace for the largest annual gain since 1990. The surge analysts attribute to everything, from the soaring commodities prices to the nearly $5.3 trillion U.S. fiscal stimulus that has been passed since the beginning of the pandemic. The U.S. economy is forecast to slow to 2.7% in the third quarter, compared to 6.7% in the previous quarter. [.USGDPA=ECI]

Many economists think stagflation will not be inevitable. The Federal Reserve says that rising prices are temporary. It is now at an all-time high of 22.1% and up from last year.

(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)

Many investors remain on high alert because of the damaging effects of past periods of stagnation on asset prices.

Google (NASDAQ:) searches for “stagflation” this month are on track to hit their highest level since 2008, while Goldman Sachs (NYSE:) 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 will tighten all our portfolios, because we see the tunnel that leads to our destination. [the equity market]”Gets nervouser and more narrow.”

Stocks have suffered from stagflation in the past. 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 were also affected by the last significant stagflationary phase, which started in the 1960s. In 1980, rising oil prices, increasing unemployment, and loose monetary policies pushed the core consumer price Index up to 13.5%. The Fed then raised its interest rates nearly 20% the following year.

According to data collected by Aswath Damodaran (a New York University professor), the benchmark U.S. Treasury 10-year fell in 9 of 11 years prior to 1982. Inflation erodes the purchasing power of bonds’ future cash flows.

Orlando of Federated Hermes holds shares in companies that are able to pass rising costs on to customers, such as energy firms and industrial businesses. Navellier has primarily focused on large-box retailers who own their supply chain, such as Target (NYSE:) Inc.

DIVILED OUTLOOK

Wall Street is averse to comparisons with the 1970s and argues that inflation today’s causes are likely to disappear or be exaggerated.

Scott Kimball of BMO Asset Management is co-head for U.S. Fixed Income. He said that he believes the majority of spending in potential infrastructure bills – which are a concern for inflation-hawks – would have a long-term effect and wouldn’t impact the economy immediately.

Jean Boivin is the head of BlackRock’s (NYSE:) Investment Institute and believes that as more supplies become available, growth will accelerate. This position allows Treasury yields for higher levels.

“The inflation 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 aside from higher oil prices in 1970s, stagflation was also driven by other factors, such as price control and restricted supply.

Uncertainty exists about whether rising inflation could force the Federal Reserve to adopt a more cautious stance as it prepares for the end of its $120 billion monthly government bond purchasing program. Stocks could be affected by signs of an aggressive taper or a slower increase in interest rates.

Jason England, Janus’ global bond portfolio manager, stated that if you continue to see inflation at the same level as us next year and there is no growth, you should believe that the Fed will take action.



Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.