Fear should never make us rush into decisions, but that doesn’t mean we shouldn’t keep our ear to the ground for signs of economic turbulence and act when appropriate for our unique financial situation.
For example: The U.S. Treasury yield curve, which tracks the spread between short- and long-term bond yields, recently inverted. An inversion of this curve means that the expected yield for a short-term bond is greater than that for a long-term bond—and for financial analysts, it also means that a recession might be on the way. As Yahoo Finance reported on April 4, 2022, “An inversion doesn’t mean that there will be a recession. However, every recession has followed an inversion since 1955.”
While some believe that a recession may be coming, others, including Ironsides Macroeconomics managing partner Barry Knapp, are offering what MarketWatch calls a “counterintuitive take”—that the inversion has more to do with inflation than recession. MarketWatch quotes Knapp as saying, “The inversion…is not implying slower growth, but rather lower inflation in 2023 and beyond.”
Aside from “yield curve,” another term has been dominating financial headlines lately: “stagflation.” As always, I believe that education is key to creating the best financial portfolio for your unique situation. So let’s take a deeper look at stagflation—what it is and why analysts are saying it may impact our portfolios.
“Stagflation” refers to a period of increased inflation along with slow economic growth.
On March 17, 2022, Nasdaq wrote that “if ‘inflation’ is the nightmare for folks working toward retirement, then ‘stagflation’ is the full-blown horror flick.” They continued by listing factors such as 40-year-highs for inflation, supply chain issues, and geopolitical events as contributing to worries over stagflation.
Specifically, these concerns tend to recall the nation’s last major bout with stagflation in the 1970s, when increases in food prices led to shortages at the grocery store, and folks had to deal with soaring gas prices.
But with uncertainty often comes opportunity, an opportunity to dig into the subject deeper and increase our understanding of the situation—and thus what we may be able to do to help protect our portfolios or even seek opportunities that may not have been apparent before.
There are worries that stagflation could lead to a “lost decade” for some portfolios.
Recently, an article by MarketWatch caught my eye. The headline spoke of a “lost decade” for those who hold what some consider “traditional” portfolios that are comprised of a 60/40 split between stocks and bonds.
The article states that according to Goldman Sachs Group Inc. portfolio strategist Christian Mueller-Glissmann and his colleagues, a “lost decade” is “defined as an extended period of poor real returns.” It continues by quoting Dynamic Economic Strategy chief executive officer John Silvia as saying that slower portfolio performance “could…last a full decade.”
Though steps are being taken to try and reduce the economic impact of inflation on consumers, including an increase in interest rates by the Federal Reserve, debate continues to rage over whether America is once again headed for stagflation.
Whether or not America is headed for a new period of stagflation remains to be seen—but as with any period of economic uncertainty, it’s important that we do our research and, where appropriate, take steps to help protect our portfolios. After all, as we’ve seen during the geopolitical crisis in Eastern Europe, uncertainty itself can sometimes be enough to have a significant impact, if only in the short term, on our economy.
One way to help protect against market factors like potential stagflation is with portfolio diversification.
Over the last few months, we’ve seen demand increase for precious metals like gold, so much in fact that at one point, prices nearly reached their all-time high. This is what I mean by keeping an eye open for opportunity. If we see analysts debating over whether recession, or even stagflation, is on the way, we can at least infer that some level of economic uncertainty exists. And historically, in times of economic uncertainty, consumers have often turned to gold and other precious metals as safe-haven assets. This may be why demand—and prices—increased.
A key factor in protecting your portfolio is diversification. Rather than relying on a 60/40 portfolio of stocks and bonds, you may decide that your unique situation could benefit from a unique portfolio—one that includes non-paper-based assets that may not react to market factors in the same way as stocks and bonds or may even act in an inverse manner.
By reducing your overall risk exposure, you can help protect yourself, your future, and your loved ones no matter what may be coming down the road. That’s what being prepared and making well-informed decisions for your portfolio is all about.
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