Sucking in the 70s again? Advisors weigh the threat of stagflation

Recession fears are growing as stocks sink, GDP stagnates and confidence collapses. Meanwhile, inflation worries are rising as consumer prices remain elevated, Treasury yields drift higher and gold shines.

Time to dig out the bell bottoms from the attic and get ready for a return to 70s style stagflation?

Maybe, maybe not, according to advisors. Either way, their Churchillian strategy generally stays the same: Keep calm and carry on.

To quickly recap, on the stagnation front, the U.S. economy rose 2.4 percent the final three months of 2024, decelerating from a 3.1 percent pace in the 3rd quarter. Gross domestic product (GDP) for the full year 2024 grew 2.8 percent, down slightly from 2.9 percent in 2023. The next GDP report, the advance estimate for Q1 2025, is scheduled to be released on April 30.

Meantime, over on the inflation side, the core personal consumption expenditures (PCE) price index, rose more than expected in February. The core PCE price index, which strips out volatile food and energy prices, rose 0.4 percent, above Wall Street’s 0.3 percent forecast. The 12-month core inflation rate ticked up to 2.8 percent from the previously reported level of 2.6 percent in January, above the consensus estimate of 2.7 percent. The next PCE report which covers March is also scheduled for April 30.

Put those two trends together - higher inflation and slowing growth – and it's hard not to see the potential for the same type of stagflation seen during the Carter administration, although in this case the spark seems to be President Trump’s tariffs as opposed to an Arab oil embargo.

Becky Lightman, founder of Lightman Capital, for one, is not busting out the Saturday Night Fever soundtrack and platform shoes just yet. In her view, the likelihood of a prolonged, full-scale trade war remains limited despite the continuing market volatility and rising recession risks. The 10 percent baseline tariff on the majority of U.S. imports appears likely to remain in place, according to Lightman. Meanwhile, she believes higher, country-specific tariff rates may serve as strategic leverage in ongoing trade negotiations.

“The current market correction has likely already priced in much of the anticipated negative impact on growth and corporate earnings,” Lightman said.

Moreover, she advises against tinkering with client allocations in the middle of this maelstrom. In her opinion, portfolio adjustments for any economic scenario should rarely be made after the fact. Instead, she believes investors must understand what they own, how those investments may behave under different market conditions, and whether they are comfortable with the potential outcomes.

“Truly diversified portfolios don’t just contain a variety of assets, they hold investment vehicles that respond differently to various environments,” Lightman said.

Elsewhere, Ed Cofrancesco, CEO of International Assets Advisory, is not worried about stagflation, saying President Trump’s economic policies will ultimately bring interest rates down with any inflationary pressure from the tariffs being minimal at most.

“I believe these tariffs will work. China’s economy is in freefall with no end in sight. It’s time for the U.S. to prioritize its own interests and demand fair trade as the foundation of any free trade,” Confrancesco said, adding that America has grown “dangerously reliant on China for pharmaceuticals and other essentials, a vulnerability we can no longer afford.”

From an investment perspective, Confrancesco said clients should already be positioned defensively with strategies like covered calls and protective puts.

“Could we see a 30 percent, 40 percent, even 50 percent correction? Maybe. But what we will see is who truly stands with America, our allies, our industrial sector, and those committed to restoring economic sovereignty,” Confrancesco said.

Moving on, Tim Holland, chief investment officer at Orion, is also not concerned about a 1970s style stagflation - at least not at the moment. Not that he does not appreciate the argument that tariffs on US imports could push up prices and push down growth. But in his view, it’s still premature to officially make the call.

“It is still very early days on the tariffs front, and there is the possibility much of what has been implemented or proposed is undone or never put into place, mitigating any potential impact on inflation and growth. Furthermore, real rates are still positive, and a natural break – we think – on inflationary forces,” Holland said. “And finally, if inflation is always and everywhere a monetary phenomenon, we are not seeing a spike in the money supply that would point to a coming spike in inflation which we saw during the pandemic and before both inflationary spikes in the 1970s.”

And while the S&P 500 is down almost 15 percent year-to-date, Holland maintains that broadly diversified portfolios should on balance be outperforming US equities so far in 2025 due to their international exposure.

“Despite recent price action, we are much more optimistic on European equities than we have been in some time, thinking recent fiscal policy announcements could be meaningful catalysts for growth. And while it has been a very difficult few weeks for US equities, we take contrarian comfort in the recent spike in investor bearishness and market volatility,” Holland said.

Finally, Michael Rosen, managing partner and CIO of Angeles Investments, agrees that it is unlikely we will reach the depths of the 1970s stagflation, with double-digit unemployment and double-digit inflation. That said, he certainly sees the risks of a recession rising considerably and inflation remaining sticky at approximately 3 percent.

As a result, he believes the Fed will struggle to achieve its dual mandate of full employment and low inflation.

“The Fed will have to be less aggressive in easing in the face of a slowing economy for fears of stoking inflation. At the same time, Congress will be less inclined for additional fiscal stimulus given the already massive deficits to spend more money,” Rosen said. “This more moderate response, both monetary and fiscal, to a recession will mean the economic slowdown will be deeper and more prolonged than it otherwise might be.”

In response, he has already moved his equity portfolios away from a large US overweight to be more diversified geographically and raised cash. In fixed income, he increased the duration and credit quality of his holdings, slashing high yield and adding to Treasuries.

“This is not a time for heroics. Add liquidity and take advantage of the heightened volatility to rebalance portfolios,” Rosen said.