Concerns over a recession and inflation continue to mount as investors navigate through the market turbulence. This is leading to growing fears that the economy is headed toward stagflation—a bad mix of a stagnant (or shrinking) economy combined with growing inflation and high employment. When people are out of work and those who are employed constantly worry about job security, American consumers will invariably pullback on their spending. And when they do spend, however, their money will not go as far because high inflation will be raising prices.
Though investors are worried, the Federal Reserve doesn’t seemed to be, labeling higher inflation from tariffs as “transitory.” This suggests it will be temporary and not part of a long-term trend. But the last time inflation was called transitory during the COVID-19 days, inflation rose at record rates and stuck around.
If the Fed is off on its estimates, fighting stagflation will not be easy. The dichotomy and cause and effect of throttling interest rates are at the center of the difficulty. To curb inflation, the Fed would need to raise interest rates, which will only worsen unemployment. But if rates stay static, then inflation runs away on us. And with higher rates, businesses will not be able refinance debt nor will want to borrow new money to finance expansion, leading to a cycle of cost reduction initiatives and mass layoffs. The Fed’s fight, I suspect, will include a series of “the lesser of two evils” type decisions.
But even if stagflation is headed our way, that still doesn’t mean we should cash out. For long term investors, staying in the market is the most important thing to do. You never want to miss out on the best days in the market, which could make all the difference on whether you lose or make money in the long run.
“You make most of your money in a bear market, you just don’t realize it at the time.” — Shelby Cullom Davis
By harnessing daily and weekly insights (via our Excel report included with Premium subscription) provided by UVstocks, you can navigate your way through a period of stagflation by seeking out undervalued stocks with strong fundamentals, focusing at a high-level on essential sectors such as consumer staples, energy and healthcare.
No matter what, people will still need basic necessities like food, household goods and personal care products. Consumer staples companies that provide such things will be more resilient in tough climates. Energy companies could be another good place to invest since energy prices tend to be a primary driver of inflation. And healthcare services will still be in demand (perhaps more so) while the economy slows down.
Keep in mind that undervalued companies you invest in should be trading below their intrinsic value; they should have strong balance sheets with low debt and lots of cash on hand to ride out the storms. They should have consistent dividend payouts and consistent earnings with minimal extremes in profits and losses, as well as pricing power where they can transfer rising costs into their goods and services without reducing consumer demand.
Most importantly, be sure to remain patient and keep a war chest on the sidelines. Finding undervalued stocks and waiting for them to appreciate can take time, especially during challenging economic times.
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” — Shelby M.C. Davis
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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