Stock-Market Caution: Potential Return to ’70s-Style Stagflation
Stock-market investors should remain cautious as strategists warn of a potential return to a ’70s-style “stagflation.” High inflation, occurring in three waves coinciding with geopolitical events, is the primary concern. The recent questioning of avoiding a second wave of inflation if current policies and geopolitical developments persist is causing concerns. In a negative feedback loop scenario, investors may shift focus from equities to fixed-income assets.
A team of analysts suggests a possible shift in the market’s macro regime away from recent favorable conditions towards a 1970s-like stagflation situation. Despite discussions last year, similarities between the current geopolitical landscape and the ’70s are compelling. Events like the Vietnam War, Middle East conflicts, oil embargoes, energy crises, and rising government deficits characterized that era.
The analysts draw parallels between today and the 1970s, focusing on Eastern Europe, the Middle East, and the South China Sea as conflict zones. One energy crisis wave has already occurred, with ongoing shipping disruptions in the Red Sea. Tensions with China pose the greatest risk, potentially triggering a second wave of inflation and a market selloff.
Adding to concerns, fiscal deficits are unsustainable. If a negative feedback loop takes hold, investors may significantly shift focus to fixed-income assets from equities.
Between 1967 and 1980, stocks were mostly flat, while bonds performed well, averaging over 7% yields. Investors should consider historical patterns as they assess current market conditions, especially with recent stock rallies and milestones. Investors are also closely watching the January Federal Reserve policy meeting minutes.
Analyst comment
Neutral news
As an analyst, I predict that if the current policies and geopolitical developments persist, the market may face a potential return to a ’70s-style “stagflation”. Investors should remain cautious and may shift their focus from equities to fixed-income assets if a negative feedback loop occurs.
