With the economy slowing and inflation accelerating, talk of stagflation in the U.S., reminiscent of the 1970s, is returning.
However, there is still no solid evidence to support such a gloomy picture. Macroeconomic indicators have suffered somewhat, but this is not catastrophic.
What we are witnessing is not the precursor to an economic apocalypse but rather a response to adverse production shocks, such as a sudden spike in oil prices for importers or the imposition of sanctions.
In the U.S., it's more about managing overheating demand; overall, the economy continues to perform well.
That is why Jerome Powell said that there is neither "stag" (because the economy is growing) nor "flation" (because inflation is relatively low) in the United States.
What does it take to talk about stagflation seriously?
Usually, to speak of stagflation, GDP growth must fall below 1-2% (or even negative), while inflation soars above 3-4% per year.
The U.S. is nowhere near those numbers, but we can't completely rule out getting to that dangerous point. The last few years have shown us that anything is possible.
But let's say the worst-case scenario comes true. In that case, things will not look good for the regulator and the financial markets, especially the riskier ones.
Theoretically, if the country goes into stagflation, investors will flee equities and turn to fixed-income assets that promise higher yields.
Some believe silver (XAGUSD) and gold (XAUUSD) could provide stability and resilience in economic uncertainty. And for equities, it would be prudent to focus on companies with long-term prospects.
As for the U.S. market, the trend remains bullish despite the Federal Reserve rethinking its monetary policy. There are a couple of reasons for this continued optimism.
First, liquidity continues to flow sufficiently to keep interbank rates low, with banks parking over $400 billion in additional funds overnight through reverse repos.
Second, share buybacks by companies are increasing as earnings season approaches.
About one-sixth of the $934 billion share repurchases this year are expected to occur in May and June. And companies have already authorized more than $550 billion in buybacks so far this year.
It should be noted that, by law, companies have to pause buybacks before reporting earnings, and more than 80% of S&P 500 companies have already done so. So, while there are some concerns, the overall mood in the U.S. market seems cautiously optimistic.
Conclusion?
Stagflation risks remain far from substantial: the economy remains strong, unemployment is low, and inflation is slowing. As for the markets, despite some black swans, sentiment remains bullish, as does their short-term outlook.