Preparing for a Stagflation Storm

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Stagflation, an economic climate in which growth rates are sluggish and inflation is high, requires certain defensive stock market strategies, according to a Florida adviser.

“Now is not the time for a low-cost strategically diversified portfolio. This market is long in the tooth and there are many underlying factors that could cause a correction or pullback,” according to Matt Chancey, an adviser in Tampa. He and other veteran investment professionals warn that stagflation can be brutal.

“I was a teenager and college student during the late ’70s, early ’80s stagflation. It was terrible,” said Mike Whitty, a Chicago adviser, who is cautious.

“I’m anticipating a significant market correction, so I would not go all-in on the stock market right now,” he said.

If stagflation returns, some investments can ease the pain. According to investment advisers, pain relief includes certain bonds that adjust to inflation and some hard assets and tax strategies that take advantage of collapsing stock markets. A defensive strategy includes real estate and commodities, investments, and Treasury inflation-protected securities (TIPS).

TIPS protect against inflation by adjusting the value of the underlying bond up when inflation rises and down when inflation declines.

“This,” noted Russ Kinnel, a fund industry analyst with Morningstar, “makes Treasury inflation-protected securities and TIPS funds the purest hedges against rising inflation. Other bonds and bond funds are vulnerable to some degree to rising inflation, but TIPS are impervious.”

“Stagflation means we have low/slowing growth and rising rates,” according to Dennis Nolte, an adviser in Winter Park, Florida.

“This phase of the economy works well for investments tied to higher rates and higher-quality balance sheets—so hard assets like real estate, commodities, energy, basic materials work well.”

Other investments that can weather stagflation, Nolte says, include stocks of blue-chip companies that have strong balance sheets with little or zero debt and companies that have pricing power, such as technology.

“On the fixed-income side, anything benefiting from higher rates—TIPS and even senior bank loans are best, with shorter duration.”

Another adviser counsels a multi-step approach for potentially difficult times.

By Gregory Bresiger

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