This investing style has crept back up as investors worry about rising inflation and its effect on markets, but what is stagflation?
Jan. 12, 2023
There is a lot going on in the market right now and if you were scratching your head wondering what Stagflation investing was, you're not alone. Here's an explanation of this investing style, but first of all...
... what is Stagflation?
Stagflation is commonly referred to as recession-inflation. This period is known as an economic phenomenon marked by rising high inflation, high unemployment rates, and a stagnant (or sluggish) economy.
The term "Stagflation" first surfaced in the 1960s, when a UK politician used it to describe the combination of employment stagnation and inflated prices.
Throughout history, rising inflation and high unemployment has negatively impacted economic growth in major markets, which has then gone on to affect investors. During a time of Stagflation, people are generally earning less while spending more on products and services which have risen due to inflation being high.
What is Stagflation investing?
Stagflation investing is a method used by investors to limit the risks associated with high inflation and low unemployment on their portfolios.
In the 1970s Stagflation period, investors soon realized that they could not manage inflation risks by depending solely on U.S. stocks. Therefore, investors figured out how important it was to diversify their investment portfolios.
What stocks should I buy during times of Stagflation?
Value stocks, which are often characterized by stronger current cash flows, have often outperformed in high inflation environments so they are good stocks to buy during times of Stagflation. NRG Energy (NYSE: NRG), AbbVie (NYSE: ABBV), and PulteGroup (NYSE: PHM) are all lesser-known value stocks.
Every country was affected differently by the pandemic and so was every company. During the health emergency, retail, media, and healthcare were put under massive pressure. Meanwhile, tech giants Amazon (NASDAQ: AMZN), Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), and Netflix (NASDAQ: NFLX) sales skyrocketed as people turned to tech for entertainment and to help them work remotely.
To survive periods of Stagflation, investors should perform due diligence on their portfolios so they can stay ahead of the curve. By investing in a diversified portfolio of growth and value stocks, you should be able to weather the storm.
Remember, these times can also represent a great opportunity to buy the dip on growth stocks while your value start performers help you get through times of Stagflation periods.
Stagflation investing tips
- If you have invested in lots of growth stocks, which tend to be riskier, or your portfolio is not adequately diversified, and you see the economy is heading towards a period of Stagflation, it's time to dial back your risk attitude. You can invest in ETFs, value stocks, and commodities like energy and gold.
- A solid long-term investment portfolio is the best way to limit risks associated with Stagflation. We advise you to try to block all this short-term noise and focus on building a strong catalog of investments that will do well in the future.
