While the decade is still young, if inflation sticks around for the next few years, things could get pretty ugly for investors.
That’s according to this chart from Deutsche Bank, which shows how a range of assets performed during the disco and stagflation days of the 1970s.
While history never exactly repeats, Deutsche Bank strategists were aiming to offer a framework to clients on how to think about the next few years if inflation stays high even after a Fed-induced recession.
“The short answer is that for traditional financial assets like bonds and equities you would expect real wealth destruction rather than the massive real wealth creation seen over the last four decades,” the bank’s strategists Jim Reid and Henry Allen, told clients in a note on Tuesday.
Commodities would likely be a better bet, although given the run up already seen so far this decade, the easy gains have perhaps been made, they noted.
“However, gold and silver haven’t made much progress over the last two years so if the playbook follows the 1970s they are the standout cheap asset from this starting point,” said the strategists.
Fallout from the COVID pandemic and Russia’s invasion of Ukraine has driven supply chain woes and shortages of key commodities. Concerns that central banks may not get inflation under control has taken Wall Street
on an unnerving roller-coaster ride. Among the latest to express concerns was the co-chief investment officer of the world’s largest hedge fund.
“We could very easily be into this [stagflation] very quickly,” Bridgewater’s Bob Prince told Bloomberg in an interview that published Tuesday.
The next read on inflation comes Friday, via the Federal Reserve’s favorite inflation gauge. Economists are predicting that the core personal-consumption expenditures price index, which excludes food and energy, will ease back to 4.9% annually in April, from 5.2%.
The recently published May survey from the National Association for Business Economists showed that economists don’t expect the Fed will bring inflation back to its 2% target until 2024 or later. Still, most economists believe inflation will peak this year, with over a third of the view that it peaked in the first quarter.