James Cochrane, CFP, CEA

Investment Advisor

Tel: 807-223-2600
Fax: 807-223-2690
Toll Free: 800-303-3249

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BMO Nesbitt Burns
1127 Barton St.
Thunder Bay, ON
P7B 5N3
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21 King Street
Dryden, Ontario
P8N1B4

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Stagflation


Connecting the dots between economic influences and your financial success



What is “stagflation”?
Everyone is talking about stagflation and financial commentators are predicting that it’s coming. But what is it, exactly? Stagflation is what happens when a recession (two consecutive quarters of negative GDP growth, often accompanied by high or rising unemployment) occurs alongside inflation (a sustained increase in consumer prices, meaning that your dollar doesn’t go a far as before). Stagflation is the worst of both worlds — colliding.  
 
Why is inflation rising?
Everything from groceries to gas to shelter is more expensive today than it used to be, thanks to high, pent-up demand from post-pandemic consumers, unbalanced supply-and-demand scales, global supply chain disruptions, and higher energy prices caused by geopolitical events such as the war in Ukraine, among other factors. Businesses are spending less capital and cutting inventories due to higher interest rates. The stock markets are also down as much as 20% this year. Households, particularly low-income ones, are feeling a severe financial pinch.
 
We’re currently experiencing high inflation (which ideally stays around 2.0% but may surpass around 8.0%) and shrinking Gross Domestic Product (GDP) – if the autumn brings higher unemployment signalling a poorly performing economy, we could enter a recession.
 
What are the risks?
Portfolio pain       Slower global economic growth       Recession 
 
How can I stop worrying and be proactive?
 
Get your financial house in order. Whether preparing for a recession or stagflation — or just trying to set yourself up to be as financially stable as possible — it’s smart to build up an emergency fund, cut expenses from your budget and pay down debt.
 
Buy things now that you’ll need to buy in the future. Buy that car, home renovation or new appliance you’ve been dreaming about. They will only rise in price if you wait.
 
Is my team responding proactively?
  • I believe that the best strategy during stagflation is to invest in companies that have good growth patterns and the power to raise prices. We are looking for strong names – sector and industry leaders that will be the first to rebound.
  • Stocks can expose an investor to volatility, so we are becoming more defensive, holding cash to take advantage of low-priced opportunities or to manage risk.
  • We are avoiding growth sectors such as technology that tend to perform poorly in recessions, instead focusing on energy, materials, utilities and consumer staples.
  • Like the large institutions, we have moved toward alternative investments in real assets and infrastructure, and new alternative mutual funds, which include the new liquid mutual funds that involve more hedging strategies.
  • Gold has performed well in periods of stagflation and we are adding value to portfolios with gold-related investments.

Should I stay invested?
Withdrawing from the markets always proves to be a big mistake. It would prevent you from realizing the strong gains that tend to follow large market declines. Even missing out on the best five or 10 trading days in a year can cut your annual returns by as much as half.
 

How can I learn more?
Don’t hesitate to call our team if you have any questions or concerns. We’re here to decode everything that’s happening in the markets and the economy. For additional information, visit these websites:
 
What Is Stagflation And Should You Be Worried? (cnbc.com)
Stagflation: Causes And When It Will Come (forbes.com)
Inflation vs. Recession vs. Stagflation: We Define the Risks of Each (cnet.com)