Our first big battle with "stagflation" happened more than 50 years ago... And now, we're preparing to fight another one.
Buckle Up for the New Era of Stagflation
By Carlton Neel, CEO, Chaikin Analytics
Our first big battle with "stagflation" happened more than 50 years ago...
And now, we're preparing to fight another one.
If you're not familiar, stagflation has two core parts. The first part is slowing economic growth. And the second is high inflation.
For generations, economists didn't think this combination could happen...
You see, inflation normally occurs when the economy "overheats." It's the opposite of slowing growth. Instead, rapid growth and high demand for goods push prices up.
Generally speaking, a little bit of inflation is a good thing. And most of the world's central banks target a positive inflation rate.
Meanwhile, we measure economic growth using gross domestic product ("GDP"). It tells us if the broad economy is growing or not. And nobody wants slowing (or near-zero) growth.
We first experienced stagflation in the 1970s. Back then, it lasted most of the decade.
And just last week, we learned that a new era of stagflation is upon us.
This shift has big implications for America. Simply put, it looks like the bull market is over...
I'm not talking about the bull market in stocks that started around 2010. I'm looking at a much larger cycle – one that began more than four decades ago.
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Folks, we could be witnessing the end of a long-standing bull market dating back to 1981...
My mentor and friend, investment legend Marty Zweig, saw this kind of change take place firsthand. And he warned me about it many times during our 18 years working together.
In short, when stagflation occurred in the 1970s, it crushed the stock market...
The Dow Jones Industrial Average closed at more than 1,000 for the first time in November 1972. Inflation was already becoming a problem at that point.
Not long after stocks peaked in 1972, they entered a brutal bear market...
The Dow lost roughly 40% of its value through 1973 and 1974. And it didn't get back above that level permanently until 1982 – eight years later.
But it's worse than that...
For a 16-year period dating all the way back to 1966, stocks did nothing but gyrate wildly back and forth. That's 16 years of stress and nonperformance for mom-and-pop investors.
Once you take inflation into account, the devastation becomes even more obvious...
Between January 1966 and August 1982, the Consumer Price Index ("CPI") rose from 95.4 to 308.6. That's massive inflation. And when combined with the do-nothing Dow, it translated to a roughly 22% nominal decline for the index over that 16-year span.
That's why renowned economist Milton Friedman often called inflation "the cruelest tax."
I'm sharing this point with you for a simple reason...
A new era of stagflation is emerging again today.
In March, the U.S. government said the CPI rose 8.5% year over year. That's the highest level of inflation since December 1981.
And then, last week, the government told us that U.S. GDP unexpectedly shrank 1.4% in the first quarter of 2022. So in effect, the economy is going in reverse.
That's stagflation.
Plus, stocks are already gyrating wildly back and forth today...
The S&P 500 is roughly unchanged over the past year. But when you factor in inflation across that period, 8.5% of your purchasing power has vanished into thin air.
That means the breakeven price change is really an 8.5% loss. And even worse... this could just be the beginning.
So now, more than ever, you need to pick the right investments. Because as we're seeing, even small winners can turn into losers when the economy is struggling with stagflation.
Good investing,
Carlton Neel
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+2.84%
6
19
5
S&P 500
+3.02%
108
291
97
Nasdaq
+3.38%
13
61
25
Small Caps
+2.68%
249
1129
513
Bonds
+0.55%
Energy
+4.15%
17
4
0
— According to the Chaikin Power Bar, Small Cap stocks are more Bearish than Large Cap stocks. Major indexes are mixed.
Over the past 6 months, the Pharmaceuticals subsector (XPH) has underperformed the S&P 500 by -6.25%. However, its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #5 of 21 subsectors.
Top Stocks
AMPH
Amphastar Pharmaceut
BMY
Bristol-Myers Squibb
ATRS
Antares Pharma, Inc.
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