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Stagflation – a combination of stagnant growth and persistent inflation that dogged the US in the 1970s – reduces the appeal of both stocks and bonds, leaving investors with fewer places to earn returns.

While the scenario is far from certain, it loomed in the minds of investors as last year’s rise in inflation forced the Fed to launch an aggressive monetary policy tightening cycle that many believe will trigger a recession. Some also believe the recent turmoil in the banking sector will hurt lending and further dampen growth, forcing the Fed to cut rates before taming inflation.

The April survey of global fund managers from BoFA Global Research found that stagflation expectations are close to historic highs, with 86% saying it will be part of the macroeconomic background in 2024.

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Wall Street stocks are rising, US Treasury yields are falling as job data brightens the outlook

Next week’s consumer price data for April, expected on Wednesday, May 10, could provide a clearer picture of whether the Fed’s rate hikes are cooling inflation. A strong number could weigh on a rally that has sent the S&P 500 up nearly 8% this year.

“Stagflation is a growing concern,” said Phil Orlando, chief equity market strategist at Federated Hermes. reached its peak for the year.”

Friday’s US employment data showed that hourly wages rose 4.4% year on year in April, too strong to be in line with the Fed’s inflation target of 2%. However, growth remained robust, with job creation accelerating and the unemployment rate falling to a 53-year low.

Still, bets on the futures markets continued to show traders pricing in rate cuts later this year. Policymakers have insisted they will keep interest rates around current levels for the rest of 2023, after raising them by another 25 basis points this week.

Jose Torres, senior economist at Interactive Brokers, thinks the US will slide into recession later this year. Factors such as higher commodity prices and a shift to local supply chains from global ones are likely to keep inflation high even as growth slows, Torres said.

He has become more bullish on dividend-paying stocks in sectors like utilities, expecting the additional income to support returns as inflation weighs on stock valuations and the S&P 500 enters the water.

“The Fed made the mistake of being too accommodative for too long,” Torres said. “It will take longer than the market expects to make the US a country with an inflation rate of 2% again.”

Consumer prices rose 5.0% in March, well above levels for most of the past decade, although lower than last June’s peak of 9.1%. US economic growth slowed more than expected in the first quarter, while manufacturing activity remained subdued last month.

Previous periods of stagflation have weighed on equities. According to Goldman Sachs, the S&P 500 fell a median of 2.1% during quarters characterized by stagflation over the past 60 years, while rising a median of 2.5% in all other quarters.

Quincy Krosby, chief global strategist at LPL Financial, has bought gold. Prices for the metal, a popular inflation hedge and haven in uncertain times, have risen to near record highs this year, fueled by geopolitical concerns and a looming showdown over the US debt ceiling.

“It looks like gold is sniffing a tinge of stagflation,” said Krosby, who has also added exposure to stock sectors she expects to weather economic turbulence better, such as consumer staples.

Other investors were more optimistic and believed growth would hold.

Charlie McElligott, general manager of cross-asset macro strategy at Nomura Securities, pointed to the Atlanta Fed’s GDPNow estimate, which projects growth of 2.7% in the second quarter, up from 1.8% on May 1.

At the same time, expectations that the Fed is unlikely to raise rates much higher have created a better environment for investors, he said.

“Everyone is positioned for the end of the world, but when you know that the Fed is out of the game… that’s a much firmer foothold for investors than anybody expected at this point in 2023,” he said.

This story was published from an agency news agency with no edits to the text. Only the headline has been changed.