Stagflation is scary. Should investors be worried it's coming?

High inflation and stagnant economic growth would be torture for both consumers and investors. Is such a dumpster fire imminent?

A group of cinema-goers looked scared as they watch a movie.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stagflation is not a phenomenon anyone wants to see.

The term is a portmanteau of 'stagnation' and 'inflation', which indicates a time when inflation is running rampant even though economic growth is slow and unemployment is high.

Unfortunately, the macroeconomic equivalent of quicksand is starting to be mentioned in investing circles once again.

According to Ophir Asset Management co-founders Steven Ng and Andrew Mitchell, 2 forces are currently threatening to ignite stagflation.

"Inflation pressures have remained stubbornly high because some sectors are struggling to find workers, some supply chains remain backed up, and energy costs are sharply rising," they said in a memo to clients.

"The momentum of economic growth has slowed globally after the initial rebound from COVID-19-induced lockdowns."

Freight delays and costs are going through the roof

To demonstrate the labour shortages, Ng and Mitchell took freight as an example.

They showed how cargo costs on the world's most important routes, such as Shanghai to New York City and Shanghai to Los Angeles, have multiplied 5 to 6 times since the pandemic hit.

"Some of the companies we analyse and hold globally have been recently talking about difficulties getting delivery of goods out of port in Los Angeles and Long Beach to their customers. These ports handle around 40% of cargo entering the US."

As economies reopen as vaccination rates plateau, consumers are rapidly spending their lockdown savings.

"A surge in demand has seen retailers restocking from low inventory levels to try and get ahead of any supply issues before holiday season."

This combination of high demand and congested ports might result in "a messy September quarter reporting season for some US companies".

"The issues have not been so much the physical capacity at port but finding the workers to unload and truck drivers for transport as well as the restricted operating hours," the Ophir co-founders said.

"Incredibly, President Biden himself has gotten involved to help solve this problem with expanded operating times just announced."

Global growth is slowing, but will it be stagnant?

Economic growth is definitely slowing, but Ng and Mitchell are unsure it could trigger stagflation.

"We see global growth slowing but it is a far sight from stagnant," their letter read. 

"The IMF just released its global growth forecasts for 2021 and 2022 at 5.9% and 4.9% respectively, well above long-term trend levels, with US growth rates even higher at 6.0% and 5.2%."

Higher inflation could last well into next year, but the Ophir founders don't think it's long-lasting.

"Lumber prices have rolled over and based on the latest available data there's perhaps some early evidence that used car and freight prices may be peaking."

So ultimately, the talk of stagflation will die down over the next few months, according to Ng and Mitchell.

But the current concerns will put enough of a brake on stock market exuberance to provide for a "more normalised growth environment" as we start the post-COVID era next year.

The Ophir team said this would be "positive" for its investment process.

"When growth is scarcer, or at least not outright bullish, investors are willing to pay up for growth," said Mitchell and Ng.

"And that is our job: to be first to identify the companies whose better days and years are still ahead of them, but are as yet undiscovered by the market."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Economy

Woman with a coffee mug in one hand and a tablet in another along with pears on the table, symbolising inflation.
Share Market News

Why ASX 200 investors are celebrating today's Aussie inflation print

ASX 200 investors sent the benchmark index sharply higher on Australia’s inflation news.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Three business people stand on platforms in the desert and look out through telescopes.
Share Market News

3 things ASX investors should watch this week

Here are the most critical events that all portfolio owners should be keeping an eye on in the coming days.

Read more »

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Share Market News

ASX 200 off to the races amid 2024 Fed rate cut hopes

The ASX 200 is having another strong run today.

Read more »

A couple sit in front of a laptop reading ASX shares news articles and learning about ASX 200 bargain buys
Share Market News

ASX 200 lifts as RBA keeps interest rates steady

ASX 200 investors were buoyed by the RBA’s interest rate decision.

Read more »

Blue % sign with white dollar signs.
Share Market News

Why ASX 200 investors hoping for an RBA interest rate cut may be waiting until 2025

The RBA will announce its next rate decision and inflation outlook tomorrow afternoon.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Share Market News

Why is the ASX 200 retreating from this month's all-time highs?

The ASX 200 has notched several new all-time highs this month.

Read more »

A hipster-looking man with bushy beard and multiple arm tattoos sits on the floor against a sofa reading a tablet with his hand on his chin as though he is deep in thought.
Share Market News

ASX shares could get rocked Tuesday. Here's why

Stock investors will be waiting for words from one woman who could decide how well their portfolios perform over the…

Read more »