U.S. stocks hit a new all-time high last week, but the rally may be short-lived as the risk of the economy returning to a 1970s-style stagflation scenario increases, according to strategists at JPMorgan Chase & Co. It is said that there is a sex.
Marko Kolanovic, the bank’s chief market strategist, said in an analyst note to clients that the economy is moving away from a “Goldilocks” scenario (in which the economy neither expands nor contracts too much) and is similar to what has been experienced in the past. He warned that we could enter a similar era of stagflation. In the 1970s.
“Going back to the issue of market macro regimes, we think there is a risk that the story will revert from Goldilocks to something like the stagflation of the 1970s, with significant implications for asset allocation,” Kolanovic said. wrote.
Stagflation is a combination of economic stagnation and high inflation, characterized by soaring consumer prices and high unemployment.
This phenomenon devastated the U.S. economy in the 1970s and early 1980s, with soaring oil prices, rising unemployment, and easy monetary policy driving the consumer price index up to 14.8% in 1980 and the Federal Reserve’s Policymakers were forced to raise interest rates to nearly 20%. Year.
“There are many similarities with today,” analysts said. “We’ve already had a first wave of inflation, but questions are starting to arise as to whether we can avoid a second wave if policies and geopolitical developments remain the same.”
Concerns about stagflation grew in 2022 as the Fed began aggressive rate hikes to curb rampant inflation, but last year saw signs that price pressures were subsiding without significantly hurting economic growth. That concern has disappeared.
However, there have been some recent signs that inflation progress is stalling.
Consecutive consumer price index numbers released in December and January were better than expected, raising concerns that inflation could stabilize at an abnormally high level.
Investors had previously bet on a series of aggressive rate cuts this year, but tempered their expectations after a hotter-than-expected inflation report and a cautious message from Fed officials.
“Investors should be open to the possibility that there is a scenario where interest rates need to remain high for an extended period of time and the Fed may need to tighten financial conditions,” Kolanovich said.
JPMorgan CEO Jamie Dimon also pointed to economic similarities between the 1970s and 2024, including large budget deficits, massive government spending and changing trade flows.
“I’m a little skeptical of this kind of ‘Goldilocks’ scenario,” he said in an interview with FOX Business’ Maria Bartiromo in December.
