Stagflation or Recession? Which Is It?

Jeffrey Roach (00:00):

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, and in this latest edition of the Street View Podcast, we'll address the question, what happens when there's stagflation?

Jeffrey Roach (00:12):

So, let's set the stage. In the past several months, we've endured lots of changes in trade policy. Markets have alternated concerns between recession and stagflation. In this podcast, I wanna share some thoughts about the more likely outcome and what could happen in capital markets. The key thesis is this, if effective tariff rates stay in the mid-teens and labor markets hold, we think stagflation is more likely than recession. So three points to cover about stagflation. First, what is it? Second, when have we seen it? And third, how do markets react? So first, stagflation is a period where the economy experiences no or very low growth amid high prices. Now second, the last major episode of stagflation in the U.S. and U.K. occurred in the 1970s, in Brazil in the 1980s, and Japan in the 1990s, oil shocks of the seventies kicked off inflation spikes and slowed economic growth.

Jeffrey Roach (01:18):

The experience in the eighties was from serious mismanagement in Latin America. The nineties created the infamous lost decade in Japan following the collapse of the country's asset price bubble. And now our final third point highlights the various reactions in capital markets. We typically see weak corporate earnings as profit margins get squeezed and the uncertainty associated with stagflation can lead to heightened market volatility. We also see upside pressure on rates as central banks often respond to inflation with tightening monetary policy. But there's still opportunities for the savvy investor. Healthcare and consumer staples may outperform due to more stable demand. Commodities historically performed well during the aforementioned stagflationary periods, and interestingly targeted real estate exposure to warehouses. Healthcare facilities and residential rentals tend to offer some protection during stagflation, during periods of uncertainty. It's important for investors to take inventory of their portfolio allocations and prepare for the potential shifts in the macro landscape. Well, that's all for now, but please follow us on social media and take care.