Are The 70's Back With Stagflation?
Markets gifted us with another burst of volatility and headlines are looking apocalyptic again.
Some folks might think it's time to bail on markets, but I'll tell you why that thinking is a mistake.
First, let's peel back some layers to explore what's driving markets. (Want to discuss any concerns directly? Just Contact Us.)
The latest selloff was largely driven by concerns about how the pace of Federal Reserve interest rate hikes could affect economic growth.1
The Fed's policy of raising interest rates to bring down inflation is likely to take a chunk out of economic growth.
Is a recession or bear market on the way?
Those are risks we prepared for.
While the Fed could manage to execute a "soft landing" and successfully lower inflation without triggering a downturn, its track record isn't so good.
According to Schwab, 10 out of the last 13 rate-hike cycles resulted in a recession.2
Those aren't the best odds.
However, we are holding a couple of strong cards: the jobs market and steady consumer spending.3,4
Could those bright spots fend off a recession or downturn?
Very possibly. We’ll have to wait and see.
Are the 70’s back?
I’m talking about "stagflation."
What does that even mean?
Stagflation is a buzzword combining "stagnation" and "inflation" and signifies an economy plagued by low economic growth, high inflation, and high unemployment.5
We saw it in this country in the 1970’s during an oil crisis.
It's hard to say if it’s going to happen again. It's definitely a risk we (and the world's economists) are watching.
However, there are two points that count against a vintage 70’s stagflation scenario: 1) the jobs market and 2) inflation that might already be peaking.6
So, let's not panic.
Here's the bottom line: Market downturns, recessions, and volatility happen regularly.
We expect them.
We plan for them.
We remember that they don’t last forever.
We stay nimble and look for opportunities.
Though it looks like we're in for a rocky season, that doesn't mean it's time to hit the eject button.
Instead, we make careful shifts, especially in a rising interest rate environment.
The weeks ahead are very likely to be volatile. I’m here, I’m watching, and I’m here for you.
Eric Maldonado, CFP®, MBA
Owner, Aquila Wealth Advisors, LLC
(805)250-4552 | eric@aquilawealth.com
872 Higuera Street, San Luis Obispo, CA 93401
1 - https://www.cnbc.com/2022/05/05/stock-market-futures-open-to-close-news.html
2 - https://www.schwab.com/resource-center/insights/content/when-levee-breaks-panic-is-not-strategy
3 - https://www.cnbc.com/2022/05/01/inflation-forces-consumers-to-rethink-spending-habits.html
5 - https://corporatefinanceinstitute.com/resources/knowledge/economics/stagflation/
6 - https://www.cnn.com/2022/05/01/investing/stocks-week-ahead/index.html
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