What Assets Do Well In Stagflation? - Willowdale Equity (2024)

Knowing what assets do well in stagflation can stop the bleeding when the markets are messy. A standard strategy won’t work when inflation is high, unemployment is rising, stocks are underperforming, there’s interest rates hikes from the Federal Reserve and other central banks, and the global economy looks headed for a tailspin.

Here’s what you need to know about where to invest during stagflation, slowing economic growth, and rising interest rates.

Gold generally performs well during a long period of stagflation. Many investors see it as a solid option for diversifying risk. Like other markets, the gold market is still subject to volatility and speculation that create a good case against putting all of your money into gold.

Much of what we know about how different assets perform during stagflation comes from the extensive stagflation period during the 1970s. Gold was trading at $35 in 1971. By the time the decade ended, with inflation hitting 14%, gold was at $850. That’s a 2,300% gain! Investors who had everything tied up in stocks essentially had a “lost decade” with flat returns.

While gold is an excellent hedge against bland stock market performance and rising prices, it’s not the only asset that glitters during stagflation. Next, I’ll cover some assets that perform well in stagflation.

Certain asset categories perform better during the volatility caused by stagflation.

Here’s my rundown of historical high performers:

• Cryptocurrency: We don’t have a historical context for how crypto performs during stagflation because the concept wasn’t even a twinkle in an economist’s eye back in the 1970s. Let’s think future instead of past with this one. Crypto can be a great alternative asset to play around with during stagflation if you feel confident about which risk assets to pick during high volatility.
• Value Stocks: If you’re looking at the long game, value stocks can be great bargains during stagnation. A value stock is an undervalued stock. You have to make sure you’re not falling into a trap by assuming stagflation stocks are undervalued when they’re not.
• Gold and Silver: We covered gold’s incredible performance during the super stagflation of the 1970s when gold prices went up by many multiples. Gold and silver create excellent hedges to offset your stock market risks and beat rising inflation.
• Commodities: Commodities can be pretty “hit or miss” during stagflation. However, oil prices and agricultural commodities tend to be stronger than government bond yields, corporate bonds, and stocks in a stagflationary environment.
• Real Estate: Real assets like property provide the most significant buffer against volatility in the stock market during stagflation because people need housing regardless of what the economy is doing. Rental prices have been shown time after time to keep up with inflation. In many markets, rents outpace inflation even if the dollar’s value is sinking.

There’s no doubt that diversification is essential to offset inflation expectations and stagflation risk. However, most financial advisors consider it wise to go “light” on gold, crypto, and other “unconventional” investments to avoid getting tied up in junk assets.

Next, I want to go a little deeper into the investments that did well during the last stagflationary periods of the 1970s.

Gold, energy, and raw materials all outperformed during the 1970s stagflation. Real estate was another safe haven that allowed investors to continue building wealth through the 1980s, 1990s, and today. On the other hand, stock prices stayed flat for nearly a decade.

What we’re seeing today that’s a repeat of the 1970s is how rents keep up with inflation. A good or service that you could buy with $1,000 in 1980 would now cost around $3,260 based on an average inflation rate of 2.94% yearly. Also, it’s worth noting that rent jumped 11.98% from 1979 to 1980. This is significant because it shows us that rents might not even reach their highest increase until we’re just about out of the woods with our current stagflation event.

Something is happening today that wasn’t happening in the 1970s that is poised to make rent inflation even higher. The United States is currently experiencing sky-high commodity prices and a lumber shortage, causing lumber prices to be 400% higher than average. Experts say we’re looking at a new housing shortfall ranging from 1.3 million to 2 million. With fewer homes being built, existing rentals have never been more valuable. Next, we’ll cover what this stagflation talk really means for real estate.

Related Read: Who Receives Some Benefits From Inflation?

Real estate tends to either maintain or grow its value during stagflation. This mostly has to do with the fact that building new homes becomes more complex as costs for building materials increase. In addition, many people put off plans to build new homes out of fear of economic turmoil.

This creates a housing squeeze that creates the perfect financial conditions to drive up prices for existing homes. As existing home prices rise, rents increase since fewer properties are on the market.

1. Business Insider, “Today’s gold market looks a lot like the crazy 1970s“
2. Forbes, “Worried About Inflation? Here’s What Investments Worked In The 1970s“