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By David Randall
NEW YORK (Reuters) - Phil Orlando has not heard this many people mentioning stagflation since he was a financial journalist in the late 1970s, when oil prices were soaring and inflation stood at more than double its current level.
Now the chief equity market strategist at Federated Hermes, Orlando says stagflation is poised to make a comeback and is piling into shares of companies that can thrive during periods of high inflation and slower economic growth.
"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. That's stagflation."
Consumer prices rose at an annual pace of 5.4% last month, on track for their highest annual gain since 1990, a surge that analysts have pinned on everything from soaring commodity prices to some $5.3 trillion in U.S. fiscal stimulus passed since the start of the pandemic. Meanwhile, third quarter U.S. economic growth is expected to fall to 2.7%, from the prior quarter's 6.7% rate. [.USGDPA=ECI]
Most economists believe stagflation is far from inevitable, and the Federal Reserve has said rising prices will prove temporary. The S&P 500 is up 22.1% this year and stands near record highs.
(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)
Yet many investors are on alert, wary of the corrosive effect that past periods of stagflation have had on asset prices.
Google searches for “stagflation” this month are on track to hit their highest level since 2008, while Goldman Sachs 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 are going to tighten up all our portfolios because we see us going into a tunnel where [the equity market] gets more nervous and narrow."
Past episodes of stagflation have weighed on stocks. 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 also struggled during the last major stagflationary period, which began in the late 1960s. Spiking oil prices, rising unemployment and loose monetary policy pushed the core consumer price index up to a high of 13.5% in 1980, prompting the Fed to raise interest rates to nearly 20% that year.