Is 1970s-style ''Stagflation'' making a comeback?
''In a note to clients released Thursday, a team of analysts at Bank of America warned that investors should at least prepare their portfolios for the possibility of stagflation -- an economic phenomenon in which slow growth, relatively high unemployment and inflation occur contemporaneously.
Stagflation was a major problem for the U.S. during the 1970s, when the OPEC oil embargo helped fuel an inflationary spiral while also crimping economic growth. Inflation as measured by the consumer-price index peaked at an annual rate of 13.5% in 1980 before the Federal Reserve, led by former chairman Paul Volcker, finally put a stop to it by cranking up interest rates.''
''Some might find the prospect of higher inflation confusing. It wasn't long ago that market strategists were warning about the prospect of deflation in the U.S. as the dollar strengthened and commodity prices dropped. ''
''Bank of America's strategists aren't the only ones talking about this. In a column published earlier Thursday, The Wall Street Journal's James Mackintosh said that the widening 10-year inflation 'break-even' (the spread between the benchmark 10-year yield and its inflation-protected counterpart) suggests investors are already bracing for stagflation's return.
It has been a long time since the U.S. economy experienced stagflation -- which Bank of America defines narrowly as any period when growth breaks below the 25th percentile of its historical average while inflation trends above its 75th percentile.''
''So how should investors prepare for this eventuality? According to Bank of America's historical analysis of market trends, gold, oil and U.S. Treasurys tend to outperform during periods of stagflation, while equities tend to underperform.''
''So equity bulls beware: If first quarter GDP disappoints, as Bank of America expects, one might want to consider buying gold or Treasurys as a hedge.''