How to Protect Against Stagflation – Lessons from History
Recent concerns about a new era of stagflation in the U.S. have emerged due to escalating tariff wars. If the tariff war expands and companies are left paying higher prices for parts, it could create an environment where growth slows as consumers are less willing to buy at higher prices, while inflation remains as input costs all continue to rise.
While it’s too early to sound the alarm, looking back at the painful period of stagflation from 1973 to 1982 provides critical insights into how investors can protect themselves if it gets worse.
The Stagflation of 1973-1982
During this decade, the U.S. faced high inflation, stagnant economic growth, and rising unemployment. Investors who panicked and moved to cash found their purchasing power eroded by inflation. For example, $1 in 1973 had the same buying power as roughly 44 cents by the end of 1982. Meanwhile, equities, despite immense volatility during this period, provided returns that mostly kept pace with inflation. To be fair, bonds would have provided a similar return with less risk.
S&P 500 & 10-year US Treasuries.
Stocks, particularly in sectors like energy, commodities, and consumer staples, have historically performed well during stagflation periods. Companies that can pass rising costs onto consumers tend to maintain earnings growth, making them a better store of value than cash. During the 1970s, despite multiple bear markets, the S&P 500 still provided a hedge against inflation in the long run.
Real assets like gold did exceptionally well during this period. If we have a full-blown stagflation, I expect them to do quite well again. The challenge is that if stagflation doesn’t occur to the magnitude some fear, it may not be a great investment. And worse, gold has been up quite a bit in the past few years, possibly in anticipation of this risk, so it may go down if this blows over. Moreover, gold’s returns are inconsistent and can be very uncorrelated to stocks, so if you sell stocks to buy gold, it should be a long-term allocation that you can stick to through good and bad years.
Given today’s economic uncertainty, investors should consider:
Ensuring they have enough conservative funds to weather a downturn if it does come.
As appropriate, maintain equity exposure. Avoid panic selling, as long-term equity investments have historically been resilient and are good inflation hedges.
Consider a portion in inflation-resistant stocks and real assets/commodities if you are still concerned.
While the prospect of stagflation is concerning, history suggests maintaining a well-diversified investment strategy is key. The 1973-1982 period demonstrated that selling stocks in fear and moving to cash was a losing strategy. For those still concerned, consider a small allocation to uncorrelated assets that can help you weather a downturn.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.