Stock investors have grown concerned that the economy could soon experience a dire combination of low growth and high inflation, but Bank of America said there are a few areas of the market where they can take refuge.
In a note to clients on Friday, analysts at the bank highlighted key tenets of their stagflation playbook. Such an economic scenario, which sparked a major economic downturn in 1970s, is thought to be even worse than a traditional recession, as high inflation would curtail rate cuts meant to stimulate the economy.
The bank analyzed the performance of various stock sectors during stagflationary periods stretching back to 1957. Here are the five best-performing areas of the market analysts identified:
1. Communication services
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Average annualized growth during stagflation: 11%
Gain over the S&P 500: 4 percentage points
Year-to-date return: -3.52%
2. Utilities
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Average annualized growth during stagflation: 11%
Gain over the S&P 500: 3 percentage points
Year-to-date return: 3.24%
3. Energy
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Average annualized growth during stagflation: 10%
Gain over the S&P 500: 3 percentage points
Year-to-date return: 6.21%
4. Consumer staples
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Average annualized growth during stagflation: 10%
Gain over the S&P 500: 3 percentage points
Year-to-date return: 1.66%
5. Healthcare
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Average annualized growth during stagflation: 10%
Gain over the S&P 500: 3 percentage points
Year-to-date return: 6.17%
Real estate and financials also slightly outperformed the S&P 500 on an annualized basis during stagflationary periods. Industrials, consumer discretionary, materials, and technology were the worst-performing sectors, underperforming the S&P 500 in average annualized growth by at least 2 percentage points.
Investors are increasingly pricing in the possibility of stagflation in the coming year.
Bank of America’s fund managers survey found that 71% of managers said they expected stagflation to hit the global economy sometime over the next 12 months. The survey also found that money managers reduced their holdings of US stocks in record amounts the week of March 7 to March 13.
Bank of America Global Research
Strategists at firms including Stifel, BCA Research, and UBS Global Wealth Management have all raised concerns about stagflation in recent weeks.
The warning calls grew louder last week when Fed policymakers indicated they are also eyeing the risk that inflation could trend higher than thought while growth slows more than expected in 2025.
Fed officials lifted their median inflation forecast to 2.7%, up from the prior estimate of 2.5%. They also trimmed their median expectations for GDP growth to 1.7%, down from the prior 2.1% forecast.