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Analysis-Oil price surge revives Wall Street fears of 1970s-style stagflation -Breaking


© Reuters. FILE PHOTO – A man in 1970s-themed gold shoes and clothing dances along the streets of Hamburg during the Schlagermove Festival on July 7, 2012. REUTERS/Fabian Bimmer/File photo

By David Randall

NEW YORK (Reuters). Wall Street’s mood is reminiscent of the 1970s. There are concerns about rising oil prices as well as hawkishness at the Federal Reserve. Apart from bell bottoms, stagflation is the absence of stagflation. It occurs when there’s both high inflation and low growth.

But some investors think it might be possible.

They will be recalibrating portfolios in preparation for a period of low inflation and lower growth.

Russia is a top exporter of commodities and sanctions have helped to raise the price by 80% over the past year to $116 per barrel. This has stoked concerns about higher energy prices, which will push up global growth while also increasing consumer prices.

However, investors are now less confident about the Federal Reserve’s ability to tighten monetary policies in an effort to curb inflation. Now, investors expect that the Fed will raise rates to zero to 1.5% in February 2023 from 1.75% or more just weeks ago. [FEDWATCH]

A BoFA Global Research survey showed that 30% of fund managers believed that stagflation would occur within the next 12 month. That’s compared to 22% last month.

Anders Persson (chief investment officer global fixed income, Nuveen) stated that although our base case is not yet 1970s stagflation but that we’re moving closer to it.

Investors are particularly concerned by the threat of stagflation because it affects all asset classes and leaves investors with very few options. A diversified portfolio of global equities, bonds and real estate could end up losing 13% in the event that rising oil prices cause stagflation, according to a stress test model by MSCI’s Risk Management Solutions research team.

In the 1960s, there was a major period of stagflation. The Fed raised interest rates by nearly 20% in 1980 due to rising oil prices and falling unemployment.

According to Goldman Sachs (NYSE): The median fell by 2.1% in quarters that were markedly affected by stagflation during the past 60 years while it rose a median 2.5% for all other quarters.

Persson, who is concerned about bond prices being affected by market volatility recently, seeks out opportunities to invest in high-yield bonds. He believes this may provide a hedge against future declines that could be caused by stagflation.

Worries that stagflation may hit Europe harder due to its heavier reliance on energy imports will likely cause some investors to edge away from the region’s assets, said Paul Christopher, head of global market strategy at Wells Fargo (NYSE: ) Investment Institute. As U.S. stock valuations rose, it became popular to move out of U.S. assets into European securities.

There is a lot of opportunity in the COMMODITIES

Christopher said that Europe’s stagnation would most likely be like the prolonged period of high growth and low inflation that the United States went through in the 1970s.

He stated that if Europe’s energy prices rise too much, then European factories would have to close down.

Persson, Nuveen’s economist estimates that an EU economy with a Brent crude oil cost of $120 a barrel would lose 2 percentage points. The rise in oil prices is likely to reduce the U.S. economy by 1 percentage point, partly due to its higher domestic production and lower taxes.

According to ICI data, U.S. equity funds have received $44.5 billion in new inflows from February while global stock funds have pulled back, with $2 billion of outflows.

Funds that focus on commodities have received $7.7 Billion in inflows from the beginning of the year. This includes the biggest one-week net gain since August 2020 according to ICI data.

These inflows were accompanied by sharp price rises in raw material that has benefited commodities exporters like Australia and Indonesia.

Advisor Asset Management chief investment officer Cliff Corso said, “We see a long surge of opportunity in commodities”

As a hedge against higher inflation and stagflation, his fund holds positions in emerging markets equities as well as commodities from oil-rich nations like Mexico.

According to Lindsey Bell (chief markets and money strategist, Ally), a strong job market, as well as domestic energy sources, should make U.S. equity, particularly dividend-paying, attractive even in rising inflation.

She said, “The consumer continues to be healthy and has been capable of absorbing higher inflation thus far.”