What would you like to know
- The ringing end-of-cycle alarms now include lingering concerns about inflation and the Federal Reserve’s reaction.
- So far, there are more differences than similarities between today’s inflation and the stagflation of the 1970s.
- Advisors and their clients should closely monitor the correlation between bond yields and stock prices.
“There are end-of-cycle alarms that have sounded lately,” including lingering concerns about inflation and the Federal Reserve’s reaction, Liz Ann Sonders, chief investment strategist at Charles Schwab said on Tuesday. & Co. at the Schwab Impact virtual conference. .
Lately, she has questioned whether the recession caused by the COVID-19 pandemic had “been a traditional recession in the sense that it launched a new economic cycle, or could it be more properly seen as a war that interrupted an ongoing business cycle “- or maybe it’s” something completely different, “she told viewers.
Below are some of the top things that are or should be of concern to advisors and their clients right now, according to Sonders.
1. Continuous inflation leading to stagflation.
“The key question is whether the poisonous COVID brew and its impact on global supply chains is a setup for 1970s-style stagflation,” according to Sonders. But, so far, “there are more differences than similarities,” she said.
After all, she explained, “the purest definition of stagflation includes high and rising unemployment – clearly, unlike today’s extremely tight labor market, while productivity is also much higher. strong today “.
Meanwhile, “secular forces tend to change and create a dominant inflationary or deflationary environment,” she said. But she said: âPsychology also comes into play when the psyche of workers and businesses changes and everyone decides they can use their power to demand higher wages. [and] pass on higher costs on a persistent basis. This is where the so-called wage-price spiral kicks in.
All inflation is not the same, she continued. âThere are two main categories of inflation. Procyclical inflation occurs when more vigorous economic activity drives up prices. Countercyclical inflation occurs when high prices pull economic activity down.
âI think a risk is that we have gone from pro-cyclical inflation to counter-cyclical inflation. And, for now, we have moved from an age of plenty to an age of scarcity. Interdependencies, low stocks in global supply chains have created a fairly fragile system that has become more vulnerable to shocks and their spillover effects, including the global energy crisis.
2. The Fed’s reaction to continued inflation.
It remains to be seen what the Fed’s reaction will be, according to Sonders. “We all know that there is little that central bank policy tools can do to alleviate bottlenecks in the global supply chain, but the risk is that the Fed will have to tighten policy faster than expected to stifle demand, âshe warned.
However, she pointed to a potential âmore benign scenarioâ as well: that âhigh prices cure high prices with lower demand; in other words, could inflation protect us from the Fed before the Fed feels obligated to protect us from inflation? “
As for Fed policy, “there may not be a precise or mechanical link between” quantitative easing (QE) and asset prices, but “it is clear that the promise continues to grow. Fed liquidity had significant psychological impacts, âshe said. “That is why concerns about the coming reduction remain at the center of concerns for equity investors.”