The US is heading towards stagflation, which would be terrible news for stocks, JPMorgan says


Stock market crash

There’s a 50-50 chance stocks could lose as much as 30% in the next two years, Smead Capital’s CEO warned.Getty Images

  • JPMorgan warned that today’s economic situation could shift towards 1970s-era stagflation, characterized by high inflation and low growth.

  • Such a situation would drive investors away from stocks towards fixed-income assets offering higher returns.

  • JPMorgan says current geopolitical tensions have parallels to the 1970s and could similarly drive inflation.

The US economy is at risk of tilting towards stagflation, or a period marked by low growth and persistently high inflation, which would prompt investors to favor stocks over bonds, says JPMorgan.

The firm notes that we could be headed towards a stagflationary redux of the environment in the 1970s.

“Equities were flat from 1967 to 1980, and with yields averaging above 7%, bonds significantly outperformed stocks,” JPMorgan said in a note on Wednesday, highlighting that a yield uptick from options like private credit could be game-changing to the potential boost in long-term portfolio performance.

With a recent series of hotter-than-expected economic indicators, concerns over stagflation have increased, contrasting with many prior optimistic “goldilocks” forecasts that anticipated cooling inflation and strong growth.

JPMorgan also cited geopolitical tensions as its rationale for potential stagflation, noting that 1970s conflicts in Vietnam and the Middle East led to energy crises, shipping disruptions, and a surge in deficit spending. The firm says this mirrors today’s Israel-Hamas conflict-spurred Red Sea chaos, Russia’s invasions of Ukraine, and US tensions with China.

An uncertain geopolitical environment, combined with high interest rates, would likely reduce liquidity, JPMorgan said.

“If one adds volatility that can come from political, geopolitical and regulatory uncertainty, public markets are further disadvantaged vs. private markets that can avoid the limelight of daily volatility,” the note added.

JPMorgan Chase CEO Jamie Dimon has previously mentioned that 2024 could resemble the 1970s, saying that the significant fiscal deficits, shifts in trade patterns, and dedication to substantial government expenditures — are “all inflationary.

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