How to Invest in Times of Stagflation

Stagflation is the combination of high inflation and slow or stagnant economic growth. The U.S. economy suffered through stagflation during the oil crisis of the 1970s, when high oil and gasoline prices hit a contracting economy. Purchasing power eroded as food, housing and energy costs jumped in a short period of time. The traditional buy-and-hold strategy doesn’t work during stagflation. Knowing what investments to buy and which ones to avoid is essential to surviving and thriving in a period of stagflation.

The key is to focus on investments that earn a profit during stagflation. Avoid keeping your cash tied up in corporate or government bonds. The interest rates won’t keep pace with inflation.

The first thing to do once you realize the economy is in a state of stagflation is to take your cash out of low-yielding money market accounts, savings accounts and certificates of deposit. We can look to history to see why: in December 1979, inflation hit 13.29 percent, and bank account interest rates couldn’t keep up with inflation. As interest rates increase, the value of your money and its purchasing power decreases.

The same holds true for any of your bond investments. The bond interest and principal payments you receive are paid with dollars that are worth less than the ones you used to purchase the bond.

Next, look for companies set to profit during stagflation. Oil and energy, health care, food and utilities should be the first four stock sectors on your list to investigate. Companies like Archer Daniels Foods and Johnson & Johnson have enough size and diversification to withstand stagflation while protecting their shareholders’ interests.

As the price of oil rises, oil companies pass those costs to consumers. They also book record profits and pay regular dividends to their stockholders. Your stock scanner can help you find companies in these sectors that have strong balance sheets and good growth potential and pay regular dividends.

Finally, consider investing in commodity exchange-traded funds (ETFs) to profit from rising commodity prices. Exchange-traded funds replicate the performance of the underlying security. For example, if wheat prices increase, the agricultural exchange-traded fund share price will also increase. Agricultural, energy and precious metal prices increase during a period of stagflation. Rising demand from emerging nations, including China, India and Brazil, will keep commodity prices high even if demand in the U.S. falls.