Take a look at last week’s market recap from Joe Gallemore, CIMA® Partner & Director of Investment Management for Argent Bridge Advisors. Watch the video now!
Joe’s Notes:
Markets rallied during the short Labor Day week on thoughts that the stock market may have been over-sold and hopes that the August data figures would signal more easing of Inflation. But hopes were dashed this week as inflation held steady in August, which means the Federal Reserve’s policy of aggressive rate hikes will certainly proceed as planned. This is a path not favored by both stock and bond markets, so volatility continues. The silver lining is that widespread volatility presents more buying opportunities for actively managed strategies.
Going to briefly discuss a topic you may be hearing a lot about, Stagflation. This term is a contraction of the words Stagnant + Inflation.
By now we all generally know what Inflation is. It’s when prices go up. In most scenarios, inflation comes about due to “natural” economic forces (natural academic sense, anyways).
- More dollars in the Economy – In a strong or growing economy, more people are employed, this puts more money into the consumers’ pockets, spending increases, and prices go up.
- Supply & Demand dynamics – demand for a specific product or service becomes particularly popular, so the price goes up because everybody wants it.
The other part of this funny term, being stagnant, or in a state of stagnation, refers to economic activity or economic growth. Simply put, when the economy is slowing down or even contracting. These periods are typically accompanied by unpleasant trends of rising unemployment and decreasing business profits, which have a negative effect on investment returns.
So putting together Stagnation + Inflation, you get rising prices while the economy is slowing down. No fun. Inflation is making life more expensive for people and an economic slowdown may lead to job loss and poor investment returns.
Stagflation doesn’t happen often, and when it does it seems to be related to an external shock to the economy. Many of you watching may remember the 1970’s when growth was stifled due to monetary and fiscal policy but was compounded by high inflation as the result of an oil embargo brought about by political alliances. This time around, the Covid pandemic & war, caused unprecedented interruptions in the global supply chain stalling out economic engines worldwide. And not only did this drive up prices, but central bank activity around the globe injected eye-watering amounts of cash and liquidity into the financial systems to prop up economies. These are major inflationary forces.
So here we are in the midst of effects that have been building for over 2 years. To slow down price increases, the Fed has to tighten the screws by raising interest rates. This has the knock-on effect of slowing business activity in a global economy that was already trying to recover from two years of intermittent shutdowns.
That’s the double-whammy of Stagflation.
The last point on Stagflation is that it is more of a decision than a formula. So whether it is officially here or not, we won’t know until much later, but the components of it are undeniably present. So while the Fed does what it can to turn things around, and capitalists around the world remain resilient and persistent, we recommend always staying invested so that you don’t miss the inevitable market recovery.
