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- Inflation expectations are on the rise, raising fears of “stagflation†if growth dries up.
- Comparisons to the inflation spurts of the early 1970s are misplaced, say BlackRock and Bank of America.
- A BlackRock investment strategy manager explains how to prepare for a high inflation environment.
October’s stock market swings reflect a standoff between the bears and the bulls, who are sharply divided over how to interpret bad news like disappointing jobs data, labor shortages, supply chain issues and rising gas prices along with good news like declining COVID-19 cases and high income expectations.
The S&P 500 rose 1.9% at the start of the month, but is still down 3.3% from its high in early September, as debate persists over the strength of economic growth and the control of inflation. Inflation expectations have recently risen, as evidenced by a sharp drop in bonds and surging yields, which are moving in the opposite direction. The yield on 10-year US Treasuries has increased 20% in the past 30 days.
Some pessimists believe that stagnant growth and runaway inflation – also called “stagflation” – are intended to upset the economy.
bull market
for the first time in five decades.
But investors shouldn’t bet on a return to the stagflationary environment of the early 1970s, says Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock, which manages $ 2.3 trillion in investment. active. Instead, the current climate resembles that of “reflation,” marked by healthy price increases in a recovering economy, Chaudhuri wrote in an Oct. 7 note.
Inflation will rise over the next few months due to the aforementioned labor shortages and supply chain complications, but Chaudhuri wrote that the Consumer Price Index (CPI), a common measure inflation, is expected to exceed 5% at the start of 2022 before falling.
“Calls for stagflation are misplaced,†Chaudhuri wrote. “The economy is growing well above its potential, with growth expected to be 6% this year and 4% next year. The consumer is supported by nearly $ 3 trillion in excess savings accumulated since the start. pandemic and there are over 11 million job openings in the US labor market. “
Strong GDP growth and high savings rates are expected to prevent any economic stagnation, while a stubbornly high unemployment rate resulting from a surplus of open jobs is expected to contain wage inflation. In theory, the abundance of open jobs means that employees’ bargaining power for raises is held back by the plethora of replacements that employers could find in the job market. However, the prevalence of labor shortages resulting from puzzling mismatches means that this may not be the case.
BlackRock’s take on inflation is corroborated by Bank of America’s rate research team, led by strategist Meghan Swiber, who wrote in an Oct. 7 memo that “slowflation” is better. description of current price spikes as stagflation.
At first glance, the so-called “dizzying†price increases seem to be a telltale sign of runaway inflation moving away from the market.
Federal Reserve
, whose mandate is to control inflation while maximizing employment. President Jerome Powell has kept a cool hand, assuring the world that price spikes are caused by imbalances between supply and demand through supply chain bottlenecks, and will soon ease.
Chaudhuri and Swiber agree with the US central bank that inflation will largely be “transient†– the Fed’s preferred term to describe temporary price increases. However, Swiber noted that while much of the price pressure wears off, some inflation will persist.
BlackRock explains how investors can prepare for inflation
While stagflation is not a credible concern for BlackRock, the company still notes that unusually high inflation is expected to affect the way active managers invest.
In this environment, Chaudhuri wrote that it is wise to target “relaunch“stocks that benefit from a healthy rise in inflation, as well as” quality “stocks that benefit from pricing power, reliable cash flow, steady earnings growth, a low level of debt and a high return on equity.
The semiconductor industry is one of many sectors that stand to benefit from the price hike, Chaudhuri wrote. A global shortage of semiconductors, which are the lifeblood of electronics, has resulted in short-term price hikes that benefit chipmakers, many of whom are part of the iShares Semiconductor ETF (SOXX).
“We had nearly $ 1.5 billion in SOXX admissions this year, and we expect this trend to continue as the subsector offers a relatively high return on cash on hand and semiconductors remain. the backbone of powerful emerging technologies, including AI and digital payments, â€Chaudhuri wrote.
In addition, what is called quality the names have high profit margins and should be better protected from temporary increases in input prices, as well as wage growth that might surprise on the upside. Equities in three sectors can “protect portfolios against rising labor costs,†in Chaudhuri’s words: technology, consumer discretionary and financials.
“Market leadership started to shift to quality sectors over the summer, with the recovery of technology and healthcare,†Chaudhuri noted.
Investors can gain exposure to these names through exchange-traded funds (ETFs) such as the Technology Select Sector SPDR Fund (XLK), the SPDR fund of the selective consumer discretionary sector (XLY) and the SPDR Fund of the selected financial sector (XLF).
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