The current state of high inflation and crashing markets indicates stagflation. A period when the inflation rate spikes while the economy slows down to an almost standstill - stagnation.
Stagflation is reflected in individuals’ diminishing buying power and rising borrowing costs, resulting in sluggish growth and an increase in unemployment. In these times, wages are unable to keep up with inflation, and a volatile economy forces companies to lay off employees.
Reasons for stagflation:
Our present condition is a consequence of myriad factors that intertwine to create a cascading effect. From the global supply shock created by the Ukraine-Russia war to rapid market rebalancing and correction post-pandemic.
Consumer Price Index (US) - 12-month percentage change
The federal banks’ attempt to tame inflation by raising interest rates has only aggravated the financial balance. High commodity and oil prices with slashed incomes could be leading us fast into the stagflation phase.
How to navigate forward and position our portfolios
Although the global equity market is falling, on the whole, some sectors are relatively insulated from the crash. These industries are under lesser stress and better poised to capitalize on the high inflation.
Our stagflation strategy should invest in these industries and diversify portfolios to the sectors essential for human sustenance. This will ensure that our losses are minimized, and our investment footholds are positioned best for stagflation.
Ways to invest in stagflation.
There are primarily two ways to invest in stagflation. First, invest in companies that minimize gross losses. And second, invest for gains in companies that could outperform and rise to the top at the end of stagflation.
1. Defensive and Commodity stocks