The spectre of stagflation shakes stockmarkets

Stockmarkets are getting increasingly jumpy about stagflation, the combination of economic stagnation and high inflation, with America’s S&P 500 down by 4.8% in September and the FTSE 100 by 1%.

“With price increases slamming economies from all directions,” markets are getting increasingly jumpy, says Susannah Streeter of Hargreaves Lansdown. Investors also fret that weakening macroeconomic data could herald a slowdown. No wonder that in recent weeks concerns about stagflation, the combination of economic stagnation and high inflation, “seem to have turned from niggling worries to an anxiety attack”.

Markets have hit a wall

America’s S&P 500 finished September down 4.8%, its worst month since the crash in March 2020. The selling continued into this week, with the technology-focused Nasdaq Composite tumbling by 2.1% on Monday. Highly-valued technology shares are particularly vulnerable to rising interest rates and bond yields (which make bonds more appealing relative to equities). The FTSE’s exposure to commodity stocks has spared it the worst of the sell-off: the index is down by about 1% since the start of September. Yet markets seem gloomy about the outlook for the wider British economy.  

Last week the pound tumbled to $1.3441 against the dollar, its lowest level of 2021, notes Philip Aldrick in The Times. That is worrying because the Bank of England is expected to raise interest rates sooner than other central banks, which should be giving sterling a lift. There are signs that UK “growth is flagging” just as energy and food prices soar; British wage growth is “the highest since 2008”. 

If stagflation takes hold then “the Bank of England can do little about” it, says Chris Dillow in the Investors’ Chronicle. It can raise rates to fight inflation or loosen policy to stop stagnation, but not both. Some of the current inflationary pressure should prove temporary: “labour market mismatches should fade as firms… train new staff”, while the commodity cycle will eventually turn, as it always does. If there is one area for concern, it is that the current shock is exposing Britain’s chronic problem with productivity, which has grown at “just 0.3% per year” over the last 14 years. 

Goodbye “Goldilocks” 

Global markets have enjoyed a “Goldilocks” environment for much of this year, says Olivier Marciot of Unigestion. That combined “record growth” with easy monetary policy from central banks, both of which boost stocks. But as inflation spikes and central banks rein in support, that favourable alignment of the economic planets has “probably come to an end”, driving the selloff.  

Since 2008, investors have lived by “TINA”: “there is no alternative” to investing in stocks, says Jon Sindreu in The Wall Street Journal. The logic goes that whenever the economy takes a hit then central banks will step in with easy money to rescue stocks. So equities always go up. The fear now is that inflation will force central banks to hike rates no matter how much that hurts markets. Yet “every precedent suggests that… officials will course-correct whenever” bond markets throw a big enough tantrum. The recovery could also prove weaker than expected, enabling central banks to keep policy loose. “There is still no alternative” to TINA.

Recommended

Why UK firms should start buying French companies
UK stockmarkets

Why UK firms should start buying French companies

The French are on a buying spree, snapping up British companies. We should turn the tables, says Matthew Lynn, and start buying French companies. Here…
28 Sep 2022
Three funds for investing in Japanese value stocks
Japan stockmarkets

Three funds for investing in Japanese value stocks

Japanese stocks have fallen out of favour with investors, but they are looking ripe for recovery, says Max King.
28 Sep 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022

Most Popular

Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
How much is King Charles III worth?
UK Economy

How much is King Charles III worth?

What will King Charles III inherit from the late Queen? Will he have to pay inheritance tax? And how large is his personal fortune and estate?
23 Sep 2022
Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022