Stagflation is the dreaded mix of stagnant economic growth and rising prices, and it is no longer just a ghost from the 1970s. Signs of its return are creeping into today’s economy. Growth has started to slow, yet prices keep climbing. One primary reason for these troubling twin trends is President Trump’s recently enacted tariffs, which sparked the new trade war. As investors, we need to understand how these policies could fuel stagflation and consider how to protect our portfolios if this economic malaise takes hold.
For decades, Americans enjoyed relatively stable growth with low inflation. However, the landscape changed when the U.S. launched aggressive tariffs on imports under the Trump administration. The intent was to protect domestic industries and shrink the trade deficit. Instead, these tariffs act like a tax on American consumers and businesses. When imported steel, electronics, or everyday goods become more expensive due to duties, companies either absorb higher costs or pass them to consumers.
In short, tariffs push inflation up while pulling economic growth down, a recipe for stagflation. The idea behind the tariffs was to correct “unfair” trade imbalances. The president often pointed to the U.S. trade deficit as evidence that other countries were taking advantage of us. But viewing trade as a zero-sum scorecard is misleading.
Consider my fun and simple analogy: I run a perpetual trade deficit with my local grocery store. Every week, I buy groceries from them, and they never purchase anything from me. By the numbers, I’m losing in this exchange. The dollars keep flowing one way to the store. Yet this transaction clearly benefits me: I get groceries and necessities for my young family, and the store gets revenue. I would be foolish to demand the store buy some of my household items just to balance the ledger, or to stop shopping there because of this so-called deficit.
In the same way, America’s trade deficit with China means we receive phones, televisions, clothing, and countless other useful goods in exchange for our dollars. Both sides gain from voluntary trade. Imposing tariffs to force a balance is as counterproductive as charging myself extra for groceries to even things out. I’d just end up paying more without getting any richer. This grocery store analogy highlights why tariffs are an economic self-inflicted wound. Over time, such pressures can slow business investment and hiring While the cost of living rises. If both trends persist, stagflation sets in.
Stagflation isn’t just a theoretical concern; we’ve faced it before. In the 1970s, a series of blows hit the U.S. economy. Oil-exporting nations imposed an embargo that quadrupled oil prices virtually overnight, sending inflation into double digits. At the same time, economic output flatlined and unemployment climbed, creating a nightmare scenario. Traditional economic remedies failed: stimulating growth risked pouring fuel on the inflation fire while tightening policy to curb inflation threatened to deepen the recession. It took years and a lot of pain. including sky-high interest rates and two recessions to finally break the cycle.
That is the medicine to curb stagflation. It is not fun medicine.
Investors in that era learned some hard lessons. Stocks generally grow wealth over the long run and struggle to keep up with surging prices. Rising costs squeezed corporate earnings, and the major stock indexes essentially went nowhere once adjusted for inflation. Typically seen as safe, bonds fared even worse. Fixed interest payments lost value in real terms as inflation outpaced them.
Meanwhile, cash sitting in a savings account quickly eroded in purchasing power. For anyone holding dollars or dollar-denominated assets in the 1970s, it felt like watching ice melt on a hot summer day. On the other hand, certain assets provided refuge and even prosperity during that challenging decade. Commodities and precious metals were standout winners. Gold, for example, was a superstar: its price skyrocketed as investors sought shelter from currency debasement, rising from around $100 an ounce mid-decade to over $600 by 1980. Oil and other raw materials also soared in price, which, while painful for consumers, meant that investments tied to these commodities did very well. Tangible assets, things you can touch like metals, energy, or real estate, tend to keep their value or appreciation when paper assets falter. Real estate values climbed alongside general prices, and owning a home turned out to be a wise store of value through years of high inflation. The key insight from the 1970s is that inflation changes the rules of the game. Typically, a balanced portfolio of stocks and bonds might be fine, but those conventional strategies can disappoint during stagflation. Protecting the actual value of wealth becomes more important than chasing high nominal returns. With that historical backdrop in mind, what should a modern investor do if we find ourselves in a stagflationary environment spurred by today’s trade wars and policy missteps?
If stagflation makes a comeback, investors will need to rethink their strategies. Here are some considerations for navigating an economy that’s barely growing while prices surge:
Diversify into Commodities and Hard Assets: Resources like oil, metals, and agricultural products typically rise in price when inflation heats up. Owning a slice of the commodities sector through commodity index funds, mining stocks, or energy companies can provide a hedge. These assets tend to hold their value because they are becoming more expensive. Likewise, precious metals such as gold and silver have a long history as inflation hedges. They’re unlikely to lose their luster when currencies are weakening. Don’t expect a smooth ride (commodity prices can be volatile), but a moderate allocation here can help offset losses in other areas.
Focus on Inflation-Resilient Stocks: Not all equities suffer equally in stagflation. Look for companies with pricing power businesses that can raise their prices as costs climb without losing customers. Companies dealing in essential goods and services often fit this description; people still need soap, electricity, and groceries in tough times. Some sectors, like healthcare or consumer staples, may manage better if they can pass on costs. Additionally, firms with hard assets or commodities built into their business can naturally benefit from inflation. By contrast, avoid companies heavily reliant on discretionary consumer spending in stagflation, shoppers who cut back on luxuries, or those with tight profit margins that can’t absorb rising input prices.
Rethink the Bond Portfolio: In a normal downturn, bonds are the go-to safe haven. However, when inflation is high, traditional long-term bonds can be a trap; they pay a fixed interest rate that might not keep up with rising prices, leading to a loss of purchasing power. If you need the stability of fixed-income assets during stagflation, consider inflation-protected securities which adjust payments based on inflation, or shorter-duration bonds that won’t lock you into low rates for long periods. Another option could be high-quality corporate bonds with shorter maturities or instruments like floating-rate loans that adjust with interest rates. The goal is to avoid being stuck holding low-yield paper as inflation climbs.
Hold Some Cash and Be Nimble: This might sound counterintuitive. After all, cash loses value during inflation, but having some liquid assets can be handy in volatile times. Stagflation often brings about market turbulence. Holding a bit of cash gives you the flexibility to seize opportunities when asset prices dip or to rebalance your portfolio without having to sell other investments at a loss.
Real Estate and Tangible Assets: Real estate can offer a form of protection in stagflationary periods. Property values and rents often rise along with general prices, meaning real estate can generate income that keeps pace with inflation. Suppose mortgage rates are locked in at lower levels. In that case, real estate investors may actually benefit from paying back loans in cheaper dollars over time.
Facing the threat of stagflation, it’s easy to feel pessimistic. Indeed, an economy caught in the pincer of rising prices and stalled growth presents challenges for businesses, policymakers, and investors alike. The situation today carries a bitter irony: policies meant to strengthen the economy, like tariffs aimed at protecting industries, may end up weakening it.
While Washington battles over trade arrangements and tries to rebalance imports and exports with blunt tools, everyday Americans could pay the price in higher living costs and a tougher job market. As investors, we don’t have the luxury of changing these policies directly, but we can adapt to their consequences. There is a silver lining for the attentive investor. Turbulent times often create opportunities for those prepared to think differently. If inflation and slow growth do take hold, many will be caught off guard clinging to yesterday’s investment playbook.
In conclusion, stagflation is a formidable challenge, but it can be met with a level-headed strategy. President Trump’s tariff gambit may or may not achieve its political aims, but it has undeniably raised the stakes for investors by contributing to a more challenging economic backdrop. Savvy investors should respond by fortifying their portfolios rather than lament the return of this two-headed monster of stagnation and inflation. Just as you wouldn’t abandon a journey because of rough weather, don’t abandon your financial plan – adjust your sails instead. With a clear-eyed view of the risks and a nod to the lessons of history, you can keep your investments afloat and even thriving, no matter how turbulent the economic weather becomes.
Daily magazine for entrepreneurs and business owners
Why Human-Centric Enterprise AI Will Define the Next Generation of Business Leaders