A mix of slowing economic growth combined with persistent inflation has the potential to dash hopes for a reversal in the Fed’s aggressive campaign to tame inflation with higher interest rates. That would expose a variety of market mispricings, pulling the rug out from under this year’s rebound in stocks, credit and other risky assets.
It’s what some economists are calling “stagflation-lite” and it represents a disturbing macroeconomic backdrop for fund managers still licking their wounds from 2022’s brutal beatdowns for stocks and bonds alike.
Historical examples of the economy mired in stagflation are limited, so there’s little to serve as an investing playbook in this type of economy. For many fund managers, favored trades include high-quality bonds, gold and equities of companies able to both maintain pricing power and weather an economic slowdown.
“This year should feel something like stagflation – sticky inflation and moderating growth – until something breaks and the Fed is forced to cut rates,” said Kellie Wood, a money manager at Schroders.
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