Taking Cover From Stagflation
Key points:
- Stagflation is a strong bearish trigger for equity prices,
- It combines persistent high inflation with high unemployment, which is a significant challenge for traditional monetary policies.
- Early economic indicators signal potential stagflation risks, with rising inflation expectations and declining consumer sentiment.
- Staying proactive and flexible by regularly reviewing and adjusting investment strategies is crucial to navigating uncertain economic conditions.
- Our Limex Ai machine-learning designed portfolio combines stocks with high yields and relatively low volatility.
The Market Seems Sanguine Regarding Stagflation
Stagflation is making plenty of headlines, but its risks might still be underestimated. To put it simply, stagflation is an economic scenario where high inflation persists alongside high unemployment, breaking the traditional cycle that alternates between "hot economies" (high inflation, low unemployment) and "cold economies" (low inflation, high unemployment).
The Federal Reserve’s monetary tools are well-equipped to handle that typical hot-to-cold cycle but are ill-prepared to deal with stagflation. Therefore, the Fed has to choose whether to fight inflation or unemployment, and it will likely choose to choke inflation even if it triggers a spike in unemployment. History shows us how — in the late 1970s and early 1980s, then-Fed Chairman Paul Volcker prioritized curbing inflation, raising interest rates above 20%. While this helped bring inflation down from 13.5% in 1980 to around 3.2% by 1983, it came at a steep cost triggering two back-to-back recessions in 1980 and 1982 (including 11% unemployment by the end of 1982, the highest since WWII).
Signals of Stagflation Are Emerging
We group economic data in two categories: backward-looking and forward-looking. For example, the latest Core CPI release shows a moderate 2.8% inflation for this past February, which in isolation is relatively benign.
But forward-looking data paints a more worrying picture. For instance, the New York Fed's Survey of Consumer Expectations (SCE) and the University of Michigan Consumer Sentiment (MCS) show inflation expectations for the next 12 months rising from 4.6% to 4.9%. Moreover, the overall consumer sentiment indicator dropped to 57.9 in March 2025 from 64.7 in February, its lowest level since November 2022. These signals suggest slower household consumption leading to an economic slowdown ahead.
Limex Ai Defensive Stocks
At Limex we use artificial-intelligence based models to select stocks with different criteria. Our Cash Flow 15 list highlights stocks with high cash flow and stable fundamentals, that are an adequate safe haven for riskier markets. These investments span traditionally defensive sectors, such as consumer staples and aerospace, as well as cyclical industries where individual stocks have strong fundamentals. The portfolio currently offers a solid 6.8% yield based on the last 12 months of distributions, making it a compelling option for those seeking both income and capital protection.
