shine trader limited reports:
With the rise of energy prices, an energy crisis seems to have swept the world – the European Union, the United Kingdom, India, the United States… More and more countries are in urgent need of energy and power inventories, the prices of natural gas, oil and coal are soaring, and the inflation level is also rising. At the same time, more and more Wall Street institutions began to mention one word in the report: stagflation.
As David kostin, chief U.S. stock strategist at Goldman Sachs, wrote in the weekly newspaper: “as the stock market volatility is still high, stagflation has become the most common word in customer conversations this week.”
For stock traders, the word “stagflation” is frightening enough, because the stock market often performs very badly in a stagflation environment. Over the past 60 years, Goldman Sachs has calculated that the median quarterly real total return of the S & P 500 index is + 2.5%, but in the stagflation environment, the quarterly return has fallen to – 2.1%.
So, the biggest question now is, is stagflation coming?
Has stagflation already occurred?
Although COSTIN of Goldman Sachs has repeatedly reiterated that “stagflation is not the basic situation expectation of our economists”, the Goldman Sachs economic team has indeed lowered the GDP forecast three times while raising the inflation outlook, which is in line with most people’s broad definition of stagflation: inflation increases while the economy stagnates.
According to a research report released by the economist team of Goldman Sachs on Sunday, the bank will reduce the U.S. GDP growth forecast in 2021 to 5.6% from the previous 5.7%, and the growth forecast in 2022 to 4% from the previous 4.4%. This is the third time in two months that the investment bank has lowered its growth forecast.
Current economic indicators show this risk: Citigroup’s global inflation surprise index has soared to the highest level since its record in 1999, and Citigroup’s global economic surprise index has turned negative, which means that even if the current global economy does not fall into recession, the growth rate is slowing.
Citigroup’s unexpected global inflation index soared to a record high
Citigroup’s global economic surprise index fell to negative
However, first of all, we need to clarify the specific meaning of stagflation.
According to the monthly survey conducted by Jim Reid of Deutsche Bank, 43% defined stagflation as “economic growth close to zero or negative growth and inflation far above the target”; 30% defined stagflation as “economic growth is below trend and inflation is easily above target”* 25% defined stagflation as “a strong slowdown in growth and a strong rebound in inflation”.
The risks of these three obviously decrease one by one, and most people choose the first definition. Reid believes that according to the first definition, the risk of stagflation in the current situation has increased, but it is obviously too much to define it as “stagflation”.
However, it is obvious that many people expect stagflation in the future, especially most people believe that stagflation may occur in the UK in the next 12 months: according to the first definition of stagflation with the greatest risk (economic growth close to zero or negative growth and inflation far higher than the target), 22% and 33% respectively believe that the United States or Europe have a very high / high risk of stagflation in the next 12 months, As high as 54% believe that the UK may have a very high / high risk of stagflation.
In addition, it is worth noting that about 40% of people believe that the economic growth of the United States next year is at risk of falling below the trend level.
Which industries can benefit?
Stagflation is fatal to the stock market because it has a significant impact on enterprise profit margin. Stagflation environment usually means that the real income of residents is stable, while enterprises are difficult to improve products, the input cost is soaring, which leads to the decline of enterprise profit margin.
On the other hand, household net assets are usually under pressure in the stagflation environment, resulting in the decline of household allocation of risky assets such as stocks, resulting in weak stock valuation.
At the industry level, energy and healthcare stocks typically perform strongly during stagflation. This may explain why the energy sector has been the strongest sector in the US stock market in the past month. However, although crude oil stocks rose 14% in the past month, the medical sector fell 6%, lagging behind the performance of the S & P 500 (- 3%). The result of this split implies that compared with “stagflation”, the current market pricing is closer to “simultaneous growth of economy and inflation”.
Reid of Deutsche Bank believes that this may mean that the current market pricing may have a serious error in the judgment of “stagflation risk”. Given that Goldman Sachs has downgraded the U.S. GDP rating three times in the past two months, although stagflation has not yet come, it still needs to pay attention to its risks.
Reprint indicated source：Shine Trader Limited Live information