High unemployment and soaring inflation in the 1970s led to what economists now call "stagflation," a combination that can cripple an economy and investor portfolios. A much weaker than expected February jobs report plus a potential crude oil supply shock due to a developing conflict in the Middle East between the U.S., Israel and Iran has markets wondering whether stagflation is again on the horizon. And the stock market is selling off. "Stagflation is a serious risk for investors because of its persistence," says Michael Rosen, chief investment officer and co-founder of Angeles Investments. "That is, stagflation is rarely a transitory event and it erodes portfolio values over time, often marked by years." Comparatively, the average length of all recessions since World War II is about 10 months."In one of the many ironies or paradoxes of investing that are counterintuitive, investors are well-advised to ignore important geopolitical events, such as a war or terrorist attack, as markets recover quickly from those events, and focus instead on the underlying drivers of the economy," he says. "Stagflation, in that sense, is more impactful on portfolios than a one-off crisis."
