Best Stagflation Stocks to Invest In

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Stagflation is a rare economic phenomenon that occurs when high inflation is accompanied by economic stagnation or recession where the economic growth rate slows and unemployment remains elevated. It's a nightmare for investors as it can erode the value of their portfolios while making it difficult to find profitable investment opportunities.

However, some stocks can perform well during stagflation. Those stocks that typically offer essential goods and services, have strong pricing power and are relatively insensitive to economic cycles have the ability to ride out the economic downturn. Here are some of the best stagflation stocks to consider for your portfolio.

Best Stagflation Stocks Right Now

What is Stagflation?

Stagflation is like you're running a marathon but not getting anywhere. As explained above, it occurs when high inflation is accompanied by slowing economic growth and elevated unemployment levels.

Stagflation is tough to deal with because the impacts are felt on various fronts. Inflation erodes the value of your earnings, and economic stagnation makes it difficult to generate new income. As a result, people start spending less, which slows down the economy even more and leads to higher unemployment.

There were prolonged periods of stagflation in the 1970s and 1980s. As explained by CNN Business, in 1973, a spike in oil prices from the Arab oil embargo on the U.S. and other countries that supported Israel in the Yom Kippur War raised the cost of living dramatically. When the Federal Reserve tried to combat inflation by increasing interest rates, the economy slipped into a recession. 

Characteristics of Stagflation Stocks

When researching stocks that may perform well during stagflation, it is important to consider key features:

• Pricing power: One aspect investors should be aware of is that companies with strong pricing power are able to pass on rising costs to consumers, which can help to protect their margins and profits.
• Defensive demand: Consumer demand is a key ingredient at any time during a company’s lifecycle, but businesses that sell products or services that are considered essential or recession-proof, such as consumer staples, utilities and healthcare, are more likely to maintain demand even during a period of economic weakness.
• Balance sheet strength: It goes without saying, but firms with strong balance sheets are better positioned to weather an economic downturn and emerge stronger once the macroeconomic environment begins to improve.

Given the features listed above, it is not a surprise that industries and sectors that have historically performed well during stagflation include consumer staples, utilities, healthcare and discount retailers. In addition, precious metals such as gold and silver are often seen as safe havens during uncertainty. In addition, gold is sometimes used as a hedge against inflation.

Investors should remember that diversification helps reduce risk, which is something that should be front and center during a period of stagflation. Consider investing in a variety of different asset classes, sectors and regions. By diversifying, investors can help to protect portfolios from a downturn in one sector or region.

Should You Invest During Time of Stagflation?

Investors experience the positives and negatives of investing during a period of stagflation, and it is vital to consider both before buying shares. 

The pros of investing during stagflation include:

• Potential for solid returns: Some asset classes have historically performed well during periods of stagflation, so it can be seen as an opportunity.
• Inflation hedge: Investing in assets or stocks that are linked to inflation hedges means you may be able to help protect your purchasing power during periods of high inflation.
• Opportunity to buy assets at discounted prices: During a period of stagflation, the stock market may be depressed, which can provide investors with an opportunity to buy assets at discounted prices.

The cons of investing during stagflation include:

• Heightened risk: Investing during an economic downturn is inherently riskier than investing during a period of economic growth. Stagflation is a challenging economic environment.
• Reduced liquidity: Some asset classes can be less liquid than others during stagflation.
• Complexity: Investing during stagflation can be complex, as investors need to consider the factors that are likely to affect different asset classes.

Regardless of the economic environment, choosing the right investments is key. That is especially true during stagflation. However, that aspect of investing is also the trickiest. Investors should conduct thorough research.

Tips for Investing in Stagflation Stocks

One prudent method of investing during a period of stagflation is to focus on dividend stocks, as they can provide a steady stream of income when economic growth is slowing and inflation is rising. In addition, it is crucial to invest in companies with essential products and services, such as food, utilities and healthcare, as they are more likely to do well during a stagflationary period. These companies are less cyclical and less sensitive to economic downturns.

Aside from the stock types, investors should conduct thorough research. Investing is risky at the best of times, but when a stagflationary period takes place, the risk is elevated, meaning investors need to take extra precautions. Keeping up to date with the latest economic news is also a good tip during this period. Prioritize risk management to ensure you are not caught off guard by risks to your portfolio. 

Compare the Best Brokers for Investing

If you have made the decision to invest in stagflation stocks, Benzinga provides a comprehensive list of top brokers for you to explore and consider.

What Other Types of Investments Are Good During Stagflation?

In addition to some of the stocks above, other types of investments can provide a return during a period of stagflation. These include bonds, commodities, gold and precious metals, real estate, Treasury Inflation-Protected Securities (TIPS) and defense stocks.

Bonds

Bonds are loans that investors make to governments or corporations. In return, the borrower agrees to pay the investor back a fixed amount of money at a certain point in time, plus interest. Bonds are seen as safer investments than stocks, as they are less volatile and offer a more predictable return, making them a potentially suitable investment during stagflation. Bonds can be a good investment during this period as they can provide a hedge against inflation. 

Commodities

Commodities tend to be sound investments during stagflation because their prices often increase when inflation is elevated. Commodities are seen as a hedge against inflation because their value is tied to the underlying value of the goods they represent.

Gold and Precious Metals

Gold and other precious metals are viewed as safe-haven assets during times of economic uncertainty. They have a long history of holding their value. During stagflation, they can be good investments because they offer a hedge against inflation and can diversify your portfolio risk, providing the ability to protect your portfolio from economic downturns.

Real Estate

Real estate is debatable, especially now, given that rates are elevated, impacting the housing market. However, during times of stagflation, some investors believe it is a good sector to invest in because it is a tangible asset that tends to appreciate over time. It can provide a steady stream of income through rent payments.

Treasury Inflation-Protected Securities (TIPS)

TIPS are a type of U.S. Treasury bond that is indexed to inflation, meaning that the principal value of the bond and the interest payments are adjusted for inflation, providing a potentially solid investment choice during stagflation. During a stagflationary period, TIPS can be a positive addition to your portfolio as they reduce the impacts of inflation.

Defense Stocks

Defense stocks tend to perform well during economic downturns and times of geopolitical uncertainty because governments are typically willing to spend on defense even when other parts of the economy are struggling.

Weather the Storm of Stagflation 

Investing is not easy, but investing during stagflation takes the difficulty and risk to a new level. However, that doesn’t mean it is impossible, as there are some stocks and other asset classes that will perform well during a stagflationary period. 

The tips above will help you implement best practices when assessing potential stagflation investments. Conduct thorough research and implement an exemplary risk management strategy. 

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