Stagflation in the 1970s is a reference but difficult to replicate

Recently, concerns about overseas “stagflation” have significantly increased, and expectations for interest rate cuts have drastically declined, even shifting towards interest rate hikes within the year. Global liquidity is tightening at high levels, and all major asset classes, except for energy, are experiencing adjustment pressure. We are currently in a phase of information chaos, and market expectations will frequently switch. However, the two stagflation periods in the 1970s can still serve as a reference, as the performance and rotation characteristics of major assets provide certain clues to cope with the current potential “stagflation” risks. Yet, too many investors are simply replicating the experiences from the 1970s stagflation period, and have instead chosen gold, which has performed poorly recently; the underlying differences are also worth discussing.

Overall, during periods of economic stagflation, physical assets and cash outperform financial assets, with the dual hit to stocks and bonds leading to the failure of traditional allocation strategies (such as 60/40). However, in different stages of stagflation trading, there are certain differences in the market’s trading theme and focus, often experiencing a progression from trading “inflation,” to trading “stagflation” and “inflation” tug-of-war, and finally dominated by “stagflation” (de-inflation) in the three main stages. Specifically:

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