Stagflation stocks are a type of investment typically used during stagflation periods when there is high inflation and low economic growth. These stocks are usually defensive, and payouts from these stocks tend to be high. Many investors view stagflation stocks as a haven during periods of economic turmoil.
When economic ills such as rising inflation, high unemployment, and slow economic growth happen to a nation simultaneously, it is called a period of Stagflation. The general consumer finds they have less disposable income available to spend. During this time, consumers often earn less but must pay more for essential goods and services. The conditions leading to Stagflation are rare; however, supply shocks can happen anytime.
Globalization has meant fundamental pillars of an economy can be affected. Therefore, your investment portfolio must be carefully examined for good balance and diversity among investing options. A low-risk stagflation investing strategy will help you preserve the value of your assets during periods of economic downturn. These assets are often less glamorous than others and mainly represent ‘old economics.’ The important thing about ‘safe stocks’ is that they are based on tried and tested pillars of the economy. Supply shocks are rarely felt in these economic zones.
What Is Stagflation?
Stagflation represents a time when the economy suffers from rising unemployment, high inflation, and slow economic growth. High-unemployment means less spending and a reduction in Gross Domestic Product (GDP). When the economy stops growing, businesses must let go of employees to remain competitive. Even high-performing firms will not be able to expand and offer new positions to citizens. An economy that suffers two successive GDP contractions is described as a recession. During a recession, demand for goods and services may decline as income levels drop. With income levels falling and inflation rising, the problem is compounded.
Recessions and high inflation can occur once every ten years. The critical point is that these two problems often do not happen simultaneously. This relationship is often constant; however, during a period of Stagflation, this relationship becomes unpredictable. The unpredictability causes the market to panic, with consumers saving their money for perceived hard times ahead. The U.S. has experienced Stagflation twice in recent history. The nation was affected in the early 1970s and the late 70s to early 1980s.
Consequences of Stagflation
The consequences of Stagflation are harmful to the entire economy. Consumers will earn less while the prices in the shops continue to soar. Investors will suffer from lower returns and slow growth. An economy often takes close to ten years to recover from Stagflation as market confidence needs to be repaired by the central bank.
Investing During Stagflation
Investing during Stagflation requires a defensive approach to protect the value of your assets against inflation. Investments can be heavily damaged by periods of rising prices and a shrinking economy.
Critical Principles of Stagflation Investing
- Your investment portfolio needs stocks that allow for minimal risk.
- You need to investigate the investment market with a high chance of surviving the effects of rising inflation and a declining economy.
- Look for sectors in the economy that have the potential to do well even in an economic downturn.
- Avoid keeping your eggs in one basket. It is crucial to ensure you work on diversifying your portfolio. This task will help to ensure supply shocks don’t wipe out your assets in that sector.
- Plan for after Stagflation. Economies facing Stagflation can take up to 10 years to fully recover; however, this doesn’t mean there is no growth. After the first two years, consumers will begin to spend again, and development will still take place. Knowing that the economic downturn will not last forever will allow you to make better decisions. Buying undervalued stocks is a typical move among investors. The portfolio may take a hit in the near term; however, the stocks may become a high-performance investment in the future. This action is a long-term investment strategy and requires patience throughout different market cycles.
Best Investments for Stagflation
Invest in Real estate
The housing market is often insulated from supply shocks. Purchasing real estate is a low-risk investment that will appreciate even during Stagflation. Accommodation is a necessity in all economies, and the market is managed by public demand, which is ever-growing. The real estate market has a low correlation with stocks, so even if the stock market is doing poorly, people will still need housing. Investing in this market will allow you to avoid paying high-rental prices that are often pegged higher than current inflation rates. People turn to solid assets to store value when the dollar drops during inflation, and houses often only appreciate.
Invest in Undervalued Stocks
When there is less demand for assets on the stock market, their value will likely fall. A dip in the purchasing price of high-performing stocks presents an excellent opportunity to buy low. The idea is that the stocks will begin to rise when the economy does well again. It is a low-risk, long-term gamble if dealing with a well-established firm. These stocks are undervalued by the market currently and are considered bargain buys. The only risk associated with this choice is value traps. Value traps are stocks that appear cheap, although they are appropriately priced. These stocks will not appreciate even in an economy that is performing well.
Invest in Gold and Silver
Minerals are a safe way to hedge against supply shocks. These minerals are not high-income generators; however, they are suitable for offsetting the stock market risk when the economy experiences Stagflation. Investors often turn to gold and silver because these minerals stay consistent even during inflation. These currencies are best for storing value because they are not linked to the strength of a currency. Money doesn’t use the gold standard anymore, which means gold and silver can increase even as the value of other currencies drop.
Stagflation stocks are a good way to invest in the current market. They are undervalued by the market and have the potential to appreciate. Gold and silver are also good investments for hedging against supply shocks.