Many people who lived through the Great Depression remained frugal and fearful about bank solvency for the remainder of their lives. The generation that experienced the inflation of the 1970s were similarly scarred, constantly on the lookout for sharply rising prices and spiking mortgage rates.
Inflation-related paranoia is common in financial media headlines at the moment as the combination of supply chain tensions and the rising demand from post-pandemic economic recoveries pushes prices higher. Thankfully, Morgan Stanley strategist Andrew Sheets argues convincingly that a 1970s-style upward wage-price spiral is highly unlikely.
Mr. Sheets pointed out in a note earlier this week that the 1970s was a period of rising wages but also high unemployment, whereas now unemployment rates are falling quickly around the globe. In terms of asset prices, the current market features high stock valuations and interest rates near all-time lows, the reverse of the ‘70s.
Morgan Stanley sees the market now as more analogous to the 2004-05 period when stagflation – low growth and rising prices – was also a widespread concern. Then, manufacturing activity had started to decline while energy prices pushed inflation data higher. By mid-2005, manufacturing activity was close to registering month over month contractions while the U.S. consumer price index was climbing at an annual rate of 3.5 per cent.
Equities were volatile in 2005 with price-to-earnings ratios falling generally, but economic growth eventually resumed (at least until the financial crisis) and stagflation fears proved unfounded.
Although a skeptic regarding stagflation, Mr. Sheets remains bullish on energy prices in the coming years. He cites the work of his colleague, commodity strategist Martijn Rats, who believes that futures prices are understating energy prices, which are likely to stay elevated for the foreseeable future.
In general, however, Mr. Sheets does not think the 1970s-style stagflation story is anything like a useful guide for investors. “The 1970s are a long way away from our expectations or market pricing,” he writes. “Scenarios of slowing growth and rising inflation clash with our global forecasts of the opposite. Recent moves in inflation expectations and [manufacturing data] don’t fit the story as nicely as one would like.”
-- Scott Barlow, Globe and Mail market strategist
Also see:
A stock market malaise with the shadow of ‘70s-style stagflation
Money markets ramp up global rate hike bets, add pressure on central banks
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