Wall Street strategists say stagflation fears are exaggerated
Stagflation, usually defined as a period of inflation with declining economic output, was the most popular word coined by Goldman Sachs clients this week.
“Stagflation is not the base case forecast of our economists,” wrote David Kostin, chief US equity strategist at Goldman Sachs.
The S&P 500 fell 5.2% from September 2 through October 4 amid concerns about high valuations amid the backdrop of supply chain disruptions and labor shortages that developed in the wake of COVID-19.
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Supply chain and employment issues combined with trillions of dollars in fiscal and monetary stimulus sent the consumer price index up 5.3% year-on-year in September, near the highest pace in 13 years. This background, along with concerns about slowing growth, has sparked talk that the US is entering an inflationary and stagflationary environment, the like of which we have not seen since the 1970s.
However, many Wall Street economists, such as the Federal Reserve, say pricing pressures are likely to ease in the coming months as supply chain bottlenecks ease.
Others say we are nowhere near the stagflation seen when Jimmy Carter was in the White House.
“If the term ‘stagflation’ means the ’70s,’ a period of fluctuating wage rates and rising unemployment, this is clearly not the case,” wrote Andrew Sheets, a strategist at Morgan Stanley.
However, a Deutsche Bank survey published on Monday found that 74% of more than 600 respondents are concerned that rising inflation/bond yields poses the biggest threat to market stability.
63 per cent of respondents believe there will be another 5 to 10 per cent decline in the S&P 500 while 8 per cent fear a sharper downturn.
But Wall Street mostly agrees with the idea that the current pullback is a buying opportunity.
“Despite the near-term uncertainty, we expect the stock market to continue to rise as investors gain confidence that the current pace of inflation is ‘temporary,’,” wrote Goldman Sachs’ Kostin. “We believe this drop will prove to be a good buying opportunity, Where the 5% decline was usually in the past.”