Energy Crisis Means Stagflation Is A Greater Risk To Markets Than Investors Realize, Bank of America Strategist Says
- Soaring energy prices make stagflation a greater risk than many investors realize, a BofA Securities strategist said.
- Stagflation occurs when inflation rises sharply even as economic growth slows and unemployment rises.
- The risk worries Wall Street and contributed to the worst equity sell-off since March 2020 in September.
- See more stories on the Insider business page.
Investors should rule out the risk of stagflation at their peril as global energy prices skyrocket as winter approaches, according to a Bank of America strategist.
Claudio Piron, a top market strategist at BofA Securities in Asia, told CNBC on Monday that the recent rise in energy prices and inflation is largely due to a disruption in production and supply chains, which is “negative for growth”.
“The story of inflation is setting in,” he said, pointing to the OPEC + group meeting of oil-producing countries that helped push oil prices up to a seven-year high on Monday.
“I think you would be at your own risk to minimize the risk of stagflation,” Piron said.
The specter of stagflation haunts Wall Street and financial centers around the world, bringing back memories of the economic shocks of the 1970s.
Stagflation occurs when high and persistent inflation is accompanied by stagnation of the economy, usually accompanied by high unemployment rates. Investors hate this because an economic slowdown and high inflation are both bad for stocks.
Typically, inflation declines when unemployment rises and the economy slows, and vice versa. But sometimes that relationship can fall apart. In the 1970s, a wave of stagflation prompted policymakers to rethink the dominant economic model and helped usher in a new system based on much freer markets.
Read more: These 92 stocks in 33 sectors will hold up better and outperform their peers if inflation is rampant, according to UBS
Piron told CNBC he believes the risks to the global economy are currently “really on the stagflation side.”
“The inflation tightening is not necessarily entirely demand driven,” he said. “This is also due to supply chain constraints on the supply side. “
Piron added: “It’s negative for growth.”
Inflation has risen sharply in advanced economies in recent months. In the United States, the rate of price increase slowed from a 13-year high in August, but eurozone inflation jumped to its highest level since 2008 in September.
Fears about stagflation contributed to a sharp drop in stocks over the past month. The S&P 500 fell 4.8% in September, its largest monthly decline since March 2020. Stocks tumbled again on Monday, as the Nasdaq 100 index fell 2.16%.
However, the topic is very controversial and many analysts say stagflation fears are overblown. Many point to the fact that unemployment in advanced economies has remained relatively low during the pandemic. They note that recent economic growth has been rapid, although it is now slowing.
“The outlook is risky and growth will decline slightly, but stagflation is not one of them,” said Edward Moya, senior market analyst at Oanda. “As long as demand remains strong from consumers and businesses, permanent bulls should not lose sleep over the next year or so.”
UBS Global Wealth Management said economies are expected to remain strong over the coming year as the coronavirus wears off. In a note on Monday, he said stocks should rebound soon after a difficult September, adding: “Growth is moderating, not stagnating.”