Rising prices. Slowing growth. Market uncertainty. You’ve heard the buzzword stagflation. But what does it actually mean for your money? In this quick video, Tracey Baker and Kevin Donovan break it all down, what’s happening in the economy, how it compares to the 1970s, and what smart investors should do now. Watch now to get the facts and peace of mind.
Introduction: What Is Stagflation?
Tracey A. Baker:
Hi, I’m Tracey Baker, President and one of the lead financial advisers here at CJM Wealth Advisers, and I’m joined here today by Kevin Donovan, our Portfolio Research Director, Kevin, on behalf of our clients. I wanted to ask you to please help explain something that was mentioned recently by the chairman of the Federal Reserve, Jerome Powell last week, and we’re hearing more and more on the news stagflation. In fact, I found kind of a cute graphic, which I think helps explain what this crazy sounding phenomenon is. Maybe you can help us out here and actually explain it.
Defining Stagflation: Economic Indicators and Challenges
Kevin E. Donovan:
Sure. Well, if you look at this chart, it’s easy four part chart that shows GDP going down, unemployment rising, demand falling and inflation rising. So this is kind of the worst case scenario for the Fed. It’s really hard to break out of this because if you raise interest rates to combat inflation, you’re going to hurt the economy. If the economy is hurt, unemployment rate goes up and it’s just a vicious cycle. It’s something that the Fed wants to avoid at all costs. So what I’d like to do is focus on three of these areas, GDP, inflation and unemployment, show you where we are now in the economy to see if it looks like we’re going to be reaching the levels where stagflation would actually be something we need to worry about.
Current Economic Overview: Are We Heading Toward Stagflation?
So let’s look at the next chart that shows where we are with the economy right now.
So you see right on top it shows the GDP and last quarter GDP actually did decline. It was down 0.3%. Now there are reasons for this because of the tariffs, there was a lot of purchasing ahead of the tariffs so that people want to be able to not have to pay the tariffs when they came, so they bought things ahead of time. So that tends to bring GDP down going forward in the next quarter. GDP is expected to be positive again, and the Atlanta Fed has a figure they put out call real GDP where it’s kind real time estimate of what they expect the current quarter’s GDP to be. It’s been fairly accurate and right now it’s showing in GDP growth for the second quarter, the quarter we’re in now at about 2%, 2.4%. So that number can change over time, but it seems like we’re going to have a decent quarter of economic growth going forward.
The inflation rate right now is down to 2.3%, so it’s come down significantly from its peak of about 9% in 2022. It’s close to the fed’s, 2% target, but it’s expected to move up again over the next couple of months. Some of the reasons for that is tariffs. We’re going to probably say that word too much this call, but tariffs were expected to raise prices on consumers. You had Walmart just last week saying that they’re going to have to raise prices and one of the largest retailer in the world says something like that. You have to sit up and pay attention to what they say. Yeah, so that’s bring pressure on inflation. Also, wage growth is above the rate of inflation and that tends to put more pressure on inflation and housing costs remain high and rising. So all these things are expected to push the inflation number up a bit towards the end of this year.
Current expectations offer about a 3% inflation rate by the end of the year. The last number is the unemployment rate, and that has stayed low for ever since the post COVID period here. So we’ve been at the 4% level, which is about the lowest it’s been since the late 1960s for a few years now, and it’s been a really good strong part of the economy is the unemployment rate. So of the three things that need to go wrong badly right now, two of them seem pretty solid. One, the economy, we have that negative number, but it seems to be getting better.
Has the U.S. Experienced Stagflation Before?
Tracey A. Baker:
So it sounds like this dreaded stagflation is a bit of a perfect financial storm, although not so perfect. Now, have we been in this situation before? I mean, what happened historically when that happened?
Kevin E. Donovan:
Yeah, the classic definition of a stagflation was the entire decade of the 1970s, and I can show that in using the same economic numbers we looked at for the current period. I can show what that looks like in the 1970s on our next chart,
And you can see that it looks pretty bad. So the top level, the GDP, we had a couple of very negative periods. This all kicked off pretty much with the oil crisis in 1973. So we’re looking at 1973 to 1982. So that’s a really long period of time, 10 years of stagflation. So GDP was negative in the 73 74 time period, and then we had a rocky period, we had some spikes and some declines, and then we had the recession in the eighties. The inflation rate, however, it was significantly higher than it was now, even at our peak a couple years ago when it was 9%, it was in double digits for three years during the 1970s and early 1980s. So inflation never really went below the 5% level and we’re sitting at 2.3% right now. So inflation was much higher back then. And then the unemployment rate, it spiked in 1974. It was above 6% during most of the seventies, significantly above for most of that time as well. And then it really started to rise towards the end of it when the Fed had had enough of it and decided to really raise interest rates aggressively to break this inflation cycle and then break out of the stagflation by driving us into a deep recession. So this is what keeps the fed awake at night and this is what we’re trying to avoid happening this time around.
Tracey A. Baker:
No, that does not look good. Kevin, and I know we’ve got some clients that remember those days, and I know
Kevin, your main focus is on the investment side of the business. Historically, what do you suggest folks do to survive? If we did see a period of stagflation.
Investment Strategy During Stagflation: What Worked in the Past?
Kevin E. Donovan:
That’s a tough thing. Stagflation is tough. There’s really nothing that does very well in this period. We can look back to the 1970s and see what performance was like, and we can show that in the next chart with the stock market. And you can see the blue line there is the s and p 500 and from the 1973 start until about August of 1982. During that entire time the s and p was flat, so 0% gain and the Dow Jones Industrial average was down 13%. Now, this was half a century ago. So the economy then is much different than the economy that we have now. So back then, manufacturing very capital intensive businesses dominated the US economy. They were very hard to adapt to changing times to changes in economic situations. Now, the economy is dominated by technology companies that very lower capital intensive business, they’re much more agile.
They can turn things on and off in terms of investments much quicker than they could back then. So we have much different economy now. The things that did better in the seventies, things like commodities did well. Small stock surprisingly did well. I wouldn’t necessarily expect small caps to do well this time because the current small cap universe, half of the stocks in the small cap index are not profitable right now. They’re much fewer small cap companies now because a lot of them are staying private longer. The good ones stay private longer right now, so it’s hard to measure. It’s kind of an apple to oranges comparison right now between what worked then and what’s going to work now. As I said, you would have to have three of those major things in the economy. Inflation, GDP and unemployment get much worse for a very long period of time before we’re in stagflation. So the way to go right now is diversify your portfolio have exposures to a lot of different asset classes and stagflation. The risk is out there. I wouldn’t say it’s likely.
Financial Planning Advice to Weather Economic Uncertainty
Tracey A. Baker:
Okay. Kevin, thank you so much for your good advice and for your explanation. As planners, I know when we’re meeting with our clients, we’re always reviewing their cash reserves and ensuring they maintain a comfortable cash cushion, preferably six months of their general living expenses. I always call that your sleep at night money, that amount of money that you need to be able to sleep at night, not worry that you are comfortable regardless of where markets take us. For our retired income clients, we hold three to five years of your income needs and reserve assets to carry people through those bumpy times which may come. Our focus always remains on the plan, and as long as you remain focused on your long-term goals, you should be well prepared to survive all types of markets and economic conditions, both good and bad. We know no stormy time’s going to last forever, and even though we may feel like this time is different, we know no time is really that different and we want to remain long-term and think about your long future ahead As your planners, we’re here to answer your questions and explain things as they come up and you hear crazy terms like stagflation and you’re not quite sure what they are, you need some explanations, give us a call.
We’re here to answer your questions and to be hopefully a source of comfort and a resource for you during these kind of crazy and questionable times. Kevin, thank you for joining me today and answering our questions. And we want to thank everybody for joining us today.
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