Stagflation fears and volatility are up. But advisors are not raising their cash positions in response

Stagflation, the toxic combination of stagnant growth and high inflation, is often referred to as the worst of both worlds. And it could very well be where the U.S. economy is headed based on recent government data.

U.S. Real GDP grew at an annualized rate of 0.7% in Q4 2025, according to the Bureau of Economic Analysis, marking a significant slowdown from the 4.4% growth in Q3. Meanwhile, the U.S. Producer Price Index (PPI) surged 0.7% in February 2026, exceeding expectations and marking a 3.4% increase over the past 12 months, the highest in a year. Moreover, the economy lost 92,000 jobs in February, while long-term unemployment rose to 1.9 million.

The added twist in the current equation for advisors seeking to navigate these perilous times is the spike in market volatility. Not only is growth sagging while prices and unemployment are rising, but as of Monday morning the CBOE Volatility Index (VIX) has doubled to more than 30 since the start of the year.  

Nevertheless, despite the unnerving economic outlook, advisors are not doubling up on their cash positions to match the surge in the so-called “fear index.”    

Isaac Wakszol, CEO of Activest Wealth Management, for one, believes that at a yield of roughly 3%, the opportunity cost of staying in cash is rising every week, particularly if the Fed moves back toward two cuts and money market yields drift lower. In his view, the real danger is the “double miss.”

“If normalization happens, and we believe it is the base case, cash investors miss fixed income appreciation as rate expectations shift and equity recovery as risk premiums compress. Both can happen quickly and without warning,” Wakszol said.

Wakszol believes that client cash belongs in three places: near-term liquidity needs, a defined tactical reserve, and a psychological buffer when clients need it. Everything beyond that in his view is a "long-term drag."

“The most expensive thing about excess cash is not the yield missed today. It is the compounding missed over the next decade while waiting for an all-clear signal that never arrives with a clear label. Time in the market beats timing the market,” Wakszol said.

Elsewhere, Dory Wiley, CEO of Commerce Street Holdings, calls cash a “double-edged sword” in that it’s the ultimate safety net during a drawdown, but it’s a drag on long-term wealth during a recovery. The goal shouldn’t be all-in or all-out, according to Wiley, but progressively in.

“Think of cash as dry powder—you don't throw it all at the first spark. By scaling into markets during repricing events, you mitigate the risk of being left at the station when the market eventually slingshots higher," Wiley said.

When it comes to the economy and portfolio adjustments, Wiley says stagflation requires a shift from 'growth at any price' to 'quality with pricing power.' Investors don't need a wholesale strategy change, they need a tactical tilt, according to Wiley.

“In an environment of higher energy costs and slower growth, we focus on companies with strong balance sheets and the ability to pass costs to consumers. If you own the essentials, you can weather the stagnation, if you own the 'excess,' you're at risk," Wiley said.

Furthermore, on the topic of volatility, Wiley says it is not simply a measure of fear, but the market’s way of pricing the “unknown.”

“Today, the VIX is signaling that uncertainty is high, but historically, the real risk isn't when the VIX is at 30—it’s when it’s at 12 and everyone is complacent. At current levels, the market isn't necessarily underpricing risk, it’s finally respecting it. For the disciplined investor, this elevated VIX is a 'green light' to begin looking for value, not a reason to hide," Wiley said.

Finally, Jim Carroll, senior wealth advisor and portfolio manager at Ballast Rock Private Wealth, says the VIX appears to have stabilized in the 25 area, which is well above its long-term average of 19. He expects it to remain elevated until the Middle East conflict is definitively resolved.

And while the fear index remains elevated, Carroll points out that investors are reflexively increasing cash holdings which will need to be unwound at some point to achieve long-term return objectives. Timing these reentries, of course, is a challenge for advisors and investors.

“Even when the current hostilities subside, an overarching concern is that disruption of the flow of oil, natural gas, and other critical commodities will potentially reignite inflation and slow economic growth—stagflation. We recommend avoiding knee-jerk changes to portfolio construction in anticipation of economic outcomes that remain murky at best. On the other hand, it’s a good time to create likely scenarios and map asset allocations that can be implemented once we have greater clarity,” Carroll said.