Goodbye Goldilocks, Hello Stagflation?

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20211011 COTD x Goodbye Goldilocks, Hello Stagflation - chart website

Source: Bloomberg, Unigestion, as of 30.09.2021.

Stagflation is the opposite of the macroeconomic environment we have had for most of the last decade: decent growth and muted inflation pressures. Thus, investors have moved into positions that benefited the most over the last decade: nominal bonds (where yields continued to grind lower and have offered diversification) and equities (especially those with long-term growth prospects that have benefited from falling discount rates). However, the reversal of the macro environment to a period of stagflation is likely to lead to a significant reversal in these markets.

Our chart shows the average monthly performance of growth (credit spreads and equities), defensive (government bonds), and real assets (inflation breakeven and commodities) since 1999 and compares that to their performance in “Goldilocks” and “Stagflation” months. As the chart demonstrates, the dispersion between these two regimes is significant, making the transition from a Goldilocks scenario (as arguably we had at the beginning of this year) to an inflation shock with depressed growth a challenging one for investors.

Note: “Goldilocks” months are defined as those where our Global Growth and Inflation Nowcasters signalled low to very low risk of recession or an inflation shock. “Stagflation” months are defined as those where our Inflation Nowcaster signalled high to very high risk of an inflation shock but our Growth Nowcaster signalled the economy was not in a strong expansion (low to very high recession risk).


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