Wall Street is increasingly worried about inflation’s resurgence

Recent signs of stickier-than-expected inflation have some Wall Street strategists concerned that investors have become too optimistic about the odds of a soft landing in the US economy.

The prevailing concern is that inflation could enter an era of stagflation, where price increases reaccelerate while economic growth slows. This was most famously seen during the 1970s and 1980s when a swift move down in inflation proved to be a head fake, and the US was left fighting higher prices for more than a decade.

“We believe that there is a risk of the narrative turning back from Goldilocks towards something like 1970s stagflation, with significant implications for asset allocation,” JPMorgan chief market strategist Marko Kolanovic wrote in a note to clients on Feb. 21. He expects the S&P 500 to fall to 4,200 by the end of the year.

A string of hotter-than-expected inflation reports in January have led Kolanovic and others to conclude that inflation’s bumpy path to the Fed’s 2% target should have investors worried as stocks sit at all-time highs.

“Although it’s low probability, it’s likely that investors are under estimating the chance for stagflation in the next 12 to 18 months,” State Street Global Advisors chief investment strategist Michael Arone told Yahoo Finance. “And I think if anything, the last few years have taught investors that kind of low probability outcome happens far more often than the statistics suggest that it should happen.”

If stagflation were to take hold, real assets like commodities outperform stocks and bonds, per Arone.

“Should this kind of low probability outcome occur, investors will be better for it by having a modest allocation somewhere in the 5% to 10% range into some of those kind of real assets,” Arone said.

The inflation debate

MarketGauge.com chief strategist Michele Schneider flagged stagflation as a key risk for 2024 in January’s edition of the Yahoo Finance Chartbook. She noted “startling similarities” between the path of the Consumer…