American economy grapples with stagflation reminiscent of the 1970s due to persistent inflation

American economy grapples with stagflation reminiscent of the 1970s due to persistent inflation

Another Wall Street strategist is warning investors to prepare for a return of a 1970s-style dilemma, where inflation persists but the economy cools. – Photo illustration MarketWatch/iStockphoto

The U.S. economy is sinking into a 1970s-like dilemma, in which inflation persists but the economy cools — and investors ignore it at their peril, according to a prominent Bank equity strategist of America.

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Signs that the U.S. economy is “moving from Goldilocks to stagflation” have been growing recently, according to BofA Global equity strategist Michael Hartnett. This change could have serious consequences for the stock market that many investors are not yet taking seriously.

Stagflation refers to both high inflation and low economic growth, which plagued the U.S. economy for most of the 1970s and into the early 1980s. “Goldilocks” refers to the time when an economy is experiencing moderate growth that is not dynamic enough to fuel inflation.

Earlier this week, investors digested two higher-than-expected inflation reports. Consumer prices have increased at a pace of 3.2% over the past 12 months, and that rate could accelerate to 3.6% by June, Hartnett said.

Traders currently rate the likelihood that the Federal Reserve will cut interest rates in June at more than 50%, for the first time since it began raising them in March 2022, according to the CME Group’s FedWatch tool.

Signs of a pick-up in inflation are not limited to the United States, Hartnett said. Accelerating price pressures around the world have already prompted some emerging market central banks to pause plans to cut interest rates.

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At the same time, new signs of labor market weakness are emerging, threatening the trend toward robust economic growth in the United States.

Official Labor Department data released last week claimed that the number of workers with full-time jobs declined over the past three months, even though U.S. government data shows that the number of newly created jobs is remained robust in February, standing at 275,000.

Beyond official Labor Department data, a study of job openings in February showed that the share of U.S. workers leaving their jobs fell to the lowest level since COVID-19 lockdowns began , as do small business hiring plans, according to survey data released by the National Federation of Independent Business.

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Fewer workers quit even as U.S. government spending rose 9% from a year earlier five months into fiscal 2024. Growing budget deficits threaten to push up the 10-year Treasury yield BX:TMUBMUSD10Y above 4.5% for the first time since late. last year, Hartnett said.

Higher Treasury yields could put more pressure on U.S. stocks, which are already on track to finish lower for a second straight week as a torrid rally appears to be running out of steam.

The S&P 500 SPX lost 0.7% on Friday, ending the day at 5,117, while the Nasdaq Composite COMP fell 1% to 15,973. The Dow Jones Industrial Average DJIA lost 0.5% to 38,714.

As for the consequences on the markets, the return of stagflation would likely boost demand for commodities, gold, crypto and cash, while causing a steepening of the Treasury yield curve.

It could also cause a step change in stock market leadership, with a “series of very contrarian stocks and defensive stocks” likely to outperform, he said.

This is already starting to show, he added, noting that CL.1 crude oil prices have risen more than the Nasdaq-100 NDX since the start of 2024.

Certainly, investors aren’t ready to abandon stocks – at least not yet. They invested more than $56 billion in U.S. equity funds tracked by BofA last week, a record sum that surpassed the previous high of $53 billion from March 2021.

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Hartnett is not the only Wall Street strategist warning that the current “Goldilocks” economic environment could soon give way to something more akin to 1970s-style stagflation. JPMorgan Chase’s Marko Kolanovic &Co. said in a report released last month.

See: Stock market investors should still prepare for 1970s-style “stagflation,” strategists warn

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