Stagflation Investing: Top Assets

Stagflation investing is a term used to describe the act of investing during a time when the economy is experiencing stagflation. Some strategies can make investing a bit safer during this economic climate.

What Is Stagflation?

The term describes a period of high inflation and weak economic growth. It appeared in the 1960s to characterize difficult economic times in Britain. For investors and entrepreneurs alike, it should be a prime concern. In the current economic climate, you've heard concern about growing inflation. And if that were the only issue, protecting your wealth would be as easy as falling back on tried and tested strategies to hedge against inflation. But now, the situation has devolved into one where so-called "stagflation" is the status quo.

Why Is Stagflation a Concern for Investors?

In short, stagflation is the worst of both economic worlds: rising inflation and slow economic growth. On the one hand, inflation is at 9.1% in the United States—a 40-year high. High levels of inflation would be bad enough, weighing heavily on demand. At the same time, there are other factors at play that are helping to ensure that even falling demand won't be enough to cool rising prices. Energy costs are a good example. The war in Ukraine is inflating energy and oil prices. As demand for energy resources continues to rise, a supply hampered by the ongoing hostilities and economic sanctions struggles to rise to the occasion. And that price shock is unlikely to subside anytime soon. This is bad news for investors because the high cost of energy, in particular, is helping limit global economic growth. Demand for consumer goods is returning to pre-pandemic levels. But the cost of energy is only one factor among many that make it difficult for the supply chain to keep up. To try and cool consumer demand, central banks have increased interest rates. The Federal Reserve has made four interest rate hikes in quick succession. This is the most significant hike in interest rates since 1994. These rate increases—alongside other measures like wage and price controls—cannot halt consumer demand overnight. And according to some authorities, they may even do more harm than good. The World Bank warned in June that the risk of prolonged stagflation was an imminent possibility. With that information in mind, investors need to reconsider their future strategies.

What Is Stagflation Investing?

Even amidst the current economic situation, investors should not batten down the hatches and wait for the storm to pass. Much like investing during a recession, there can be ways to use the situation to your advantage. That's where stagflation investing comes into play. Stagflation investing describes strategies to protect and grow your wealth during a stagflation scenario. Like all investment strategies, it is a matter of making sure your resources are in the right places at the right times.

Best Investments for Stagflation

Real Estate

"Land is the only thing in the world worth working for, worth fighting for, worth dying for because it's the only thing that lasts." There's something to that famous line from Gone With the Wind. As a tangible asset, real estate has more inherent worth and reliability than financial products, stocks, and bonds. Real estate is also an effective hedge against inflation. As the dollar value drops over time, rents and property values keep pace with inflation rates. In some cases, their value can even grow faster than inflation. If you don't own property or are unwilling to make such a sizable investment, you still have options. Real estate investment trusts (REITs) are companies that own and manage income-producing properties. These include rental homes, apartment buildings, office complexes, and shopping centers. Because rents tend to match or exceed inflation rates, these can be secure investments during stagflation periods.

Industrial Commodities

Industrial commodities are bulk goods traded within an industrial market, usually through commissions or exchanges. Common examples include metal ore, fossil fuels, textiles, and foodstuffs. Almost anything used to make commercial or industrial products can fall within this category. These commodities can be safe investments because they have tangible, practical value. When there's rising inflation, commodity prices tend to rise. For example, no matter the economy's shape, there will always be a demand for copper. Why? Because of its industrial applications. Lithium is another good example right now. Because of the booming demand for electric vehicles, alongside more mundane electronics and consumer goods, lithium prices have surged 438% above last year. Prices for many raw materials like copper and lithium should remain high or increase for the foreseeable future. This is because demand remains high while global supplies struggle to keep pace.

Monetary Commodities

Monetary commodities are types of legal tender that derive their value from the commodities they're made of. Government-issued coins are common instances. For example, the American Eagle or the Canadian Maple Leaf. That their composition is a valuable material makes them distinct from fiat or representative money. Fiat money, in the form of ordinary cash, has no backing save faith in the institution that issues it. And while representative money in the form of certificates is worth a set sum of some precious metal, they have no intrinsic worth of their own. How much physical gold a $50 certificate exchanges for is always subject to change in proportion to the value of a dollar. Gold commodities, in particular, tend to perform well in periods of stagflation. Their value comes from beauty and scarcity. Its chemical properties make it an essential commodity for major industries. Because of its cultural and practical value, gold tends to be a strong hedge against inflation. The amount of a given currency in circulation could hypothetically be infinite. But because there's a finite amount of gold, it holds its value much better.

Value and Cyclical Stocks

Value stocks seem to trade at a lower price relative to their fundamentals like dividends, earnings, or sales. In other words, the stock is trading for less than it should, considering the company's performance. Stagflation is one reason why a stock becomes undervalued. This allows the investor to pick them up at a bargain. Cyclical stocks are so-named because they tend to follow macroeconomic or systematic cycles. Companies that sell consumer discretionary items are good examples. Consumers tend to spend less on these items during an economic downturn. In contrast, they spend more on them when the economy is booming. Investing in cyclical stocks takes it for granted that the economy will rebound. Be it in a matter of months or years. But in the interim, companies that depend on a lot of discretionary spending tend to suffer losses, driving their stock prices down. This lets investors buy when prices decline and sell at a gain when the economy bounces back.

Equities

During stagflation events, equities are in the same boat as value stocks and cyclical stocks. Equities are shares of ownership in a company. These can include common stocks and several other types of securities. Though equities can often weather market instability, they tend to experience temporary downturns during stagflation or recession events. For the investor who's in the right place at the right time, this can be an opportunity to make a good purchase at a bargain price.

Best Stagflation Stocks

Now we understand what makes a stock a good investment during stagflation. We want stocks and equities that are either:

• undervalued
• tied to predictable economic cycles
• can weather volatile economic conditions

Here are a few examples of stocks that could make for wise investments right now.

Kroger Co. (Ticker: KR)

Prices may be rising, but Americans still need to eat. And it seems that many are opting to spend their food budget at Kroger. They're one of the nation's largest pure-play grocery chains. As such, Kroger is producing some admirable returns. In the past, they've averaged a 23.4% return during historical periods of stagflation, making them one of the best-performing stagflationary stocks.

Hershey Co. (HSY)

It would seem that Americans crave a little sweetness during hard times. At least, that would seem to be the case if Hersey's performance is any sign. In the past, they've averaged a 23.4% return during historical periods of stagflation. This makes them one of the best-performing stagflationary stocks.

Dover Corp. (DOV)

Dover is a firm specializing in heavy industry equipment. So much like the industrial commodities we spoke of earlier, their products have a certain practical value that helps protect them from stagflation periods. In prior stagflation periods, the company managed to sustain average returns of 12.3%.

Investments to Avoid When Investing for Stagflation

Stagflation means slow or negative growth in the economy. But some investments are more sensitive to these conditions than others. Here are the main types of investments for you to avoid.

Growth Stocks

Growth stocks are shares in companies that grow quicker than others in the same industry. But when the economy slows, companies tend to put expansion plans on hold. This can have negative impacts on their perceived values. Then the prices of growth stocks either stagnate or drop.

Bonds

When a company or government issues bonds, they're crowdsourcing a loan from several investors. The bond serves as a share of that entity's debt. Then, the holder will redeem it for the principal plus interest. During stagflation periods, bonds tend to lose some of their appeal. High inflation depletes some of the purchasing power that their future returns would generate. So while the investor should still get the dollar amount promised, that return will be worth less than expected.

Cash and Cash Equivalents

Cash and cash equivalents like CDs and trust funds face the same problems as bonds. As prices continue to rise, a set amount of cash will have less and less purchasing power. We mentioned earlier that inflation had reached 9.1%, meaning that prices have increased by that amount. So any money you hold in cash has effectively lost 9.1% of its value over time. That's why keeping money in savings accounts or the like is ineffective. The interest you earn on that money will almost always be lower than the inflation rate. This translates to a net loss in value over time.

How to Invest During Stagflation: Tips and Strategies

Surviving stagflation is about more than what to invest in and what not to invest in. Equally important is how you manage those holdings. Short-selling, for example, can be a fruitful practice during stagflation. With the economy shrinking, it's not hard to find companies that you can take safe positions against. Short-selling can also be part of a greater hedging strategy. By taking an opposite position in the market, you can offset some of your losses during a downturn. But above all else, diversification is the name of the game. You should spread your holdings out across a variety of commodities and equities. That is the best way to ensure that you don't feel the stagnation of any given sector as much. If you're an entrepreneur, your business is one of your most valuable assets. Another great strategy is investing in your business to ensure its future success. Investing during stagflationary periods can be a great way to get ahead of the competition. Many businesses cut back on expenses during this time. But, if you can maintain or increase your investment in your business, you'll be in a much better position when the economy rebounds. Of course, there are risks involved in any investment, but if you're smart about it, stagflation investing can be a great way to ensure your business's future success.

*You should not consider the opinions in this article as investment advice.