For years, central banks, especially in developed economies, have been worried about anemic inflation, which despite their accommodative monetary policies stayed below the target range. Now, we have inflation running at multi-decade highs. Meanwhile, many economists fear stagflation. Which stocks can do well if the economy enters a stagflation phase?
Usually, economic growth and inflation go hand in hand. Looking at the current environment, while U.S. inflation is running at a multi-decade high, economic growth has also picked up. In an inflationary environment, central banks tighten the monetary policy. The U.S. Federal Reserve appears to be on track to tone down its bond purchases. The Fed is widely expected to raise interest rates somewhere in 2022.
What is stagflation?
Stagflation can be an economist’s worst nightmare. It’s a scenario where we have high inflation. The economic growth is lower, while unemployment is high. This doesn't leave much room for central banks to tinker with the rates. Lowering rates might help spur growth but could add to inflation. However, the opposite also holds true.
Stagflation in the 1970s
The U.S. economy witnessed stagflation in the 1970s amid the oil shock. While inflation went up, the growth stagnated. While markets are fretting over 5.4 percent, the U.S. inflation rate was in the double digits in the 1970s.
There are some similarities between the 1970s and 2021. Oil prices are adding to inflation in 2021. However, in 2021, inflation is a multi-pronged problem that's led by higher demand, supply chain issues, and raw material prices. As for growth, we would see a slowdown in economic growth in 2022. Many economists think that U.S. inflation will also come down in 2022.
If inflation comes down and the growth rate reverts to normalized levels, there wouldn’t be many fears about stagflation. Since we live in an uncertain world, stagflation isn't something that can be ruled out.
Several market participants are worried about stagflation. A Bank of America Global Research survey published earlier in October revealed that 34 percent of the respondents see stagflation as a likely scenario over the next year. That’s 14 percentage points higher than the last year and the highest percentage in a decade.
Jefferies likes certain stagflation stocks
Jefferies has picked several stocks that could do well in stagflation. The brokerage picked Taiwan-based chipmaker TCMC as the top performer in previous stagflation-like economic conditions. The chip shortage situation is also adding to inflation because it has led to supply-chain bottlenecks for several industries.
The brokerage picked Samsung and BHP Billiton as stocks that could do well in stagflation-like economic conditions. BHP stock has tumbled from its 2021 peaks amid the crash in iron ore prices.
Goldman Sachs's top inflation stocks
Goldman Sachs has also picked stocks that it thinks can do well in inflation. The stocks include names like Moderna and Apple. Apple stock has looked weak in 2021 after being the best-performing FAANG stock for two consecutive years.
Goldman Sachs also picked Netflix, Cigna, and Cardinal Health as the stocks that can do well in high inflation. Netflix stock has rebounded sharply from the lows. From being the worst-performing FAANG stock, Netflix is now the best performing FAANG of 2021 just behind Alphabet.