Rising Inflation and Slowing Growth Are Investors’ Worst Nightmare

Stagflation makes investing uniquely tricky because rising prices erode purchasing power while economic activity drops. Many strategies that work during normal downturns can backfire, so economists emphasize asset classes that can weather inflation and stock market volatility.

During the infamous period of stagflation in the 1970s, investors who maintained traditional stock-bond mixes experienced a loss of purchasing power. Conversely, those who shifted to hard assets and inflation-protected securities performed significantly better. However, it has been almost half a century since the last period of sustained stagflation, making it crucial to listen to the advice of economists for the very different era of the mid-2020s.

The Stagflation Storm Is Building

Peter Ricchiuti, senior professor of practice in finance at Tulane University’s Freeman School of Business and founder of Burkenroad Reports, told Investopedia that there’s a “climbing wall of worry” in the market, despite the steep rise in the S&P 500 this year since the market cratered in April after the first major Trump administration tariffs were announced.

“There’s so many reasons for the market to give it up here and it’s not,” Ricchiuti explained, pointing to several concerns weighing on investors. Chief among them is the specter of stagflation—”a very frightening scenario” that most investors haven’t experienced since the late 1970s.

The Fed faces an impossible balancing act, according to Ricchiuti. “The administration is saying cut rates, cut rates, get the economy going,” but policymakers know “the other side” of that equation: “You cut rates, economy gets going, and inflation soars.” Making matters worse, he noted that while the 1970s stagflation “wasn’t our fault” due to OPEC oil shocks, “This time it’s entirely our fault if it happens,” driven by policy choices like tariffs whose inflationary impact “really hasn’t hit yet.”

Adding to investor anxiety is extreme market concentration, with a relative few tech stocks “pulling the whole S&P 500.” This narrow leadership means investors buying index funds are “making a huge bet on technology” whether they realize it or not, Ricchiuti said.

With these risks converging—sticky inflation, slowing growth, and an increasingly narrow market—investors need strategies that can weather the potential storm ahead.

Positioning for Defense

Most economists recommend a balanced approach, holding a mix of equities, short-term bonds, and inflation-protected assets, such as Treasury Inflation-Protected Securities, bonds that automatically offset the effects of inflation, and commodities. For example, Mohamed El-Erian, chief economic adviser at Allianz, is more cautious about broad stock exposure in a stagflationary environment. “I would reduce equities at this point, if I’m investing over the next 12-month horizon.” He told Bloomberg.

El-Erian’s strategy highlights the need to limit risk and hold enough cash to avoid forced selling when markets tumble. Limiting exposure to long-duration bonds also preserves capital as rates rise.

Seeking Value and Stability

Top economists also advise not to put all your eggs in one basket. “The best way to grow and preserve wealth over the long run is to own a diversified portfolio of equities,” Jeremy Siegel, professor of finance at Penn’s Wharton School, has argued.

He suggests that value and dividend-paying stocks play a crucial role in managing inflation during corrections. This is because they can provide a return that is not reliant on the appreciation of underlying asset prices. Additionally, investors can consider utilities, consumer staples, and healthcare stocks. 

Hedging With Real Assets

During the stagflation of the 1970s, stocks and bonds lost over 20% in purchasing power after inflation, while long-term bonds were hit hardest. In contrast, gold delivered about 9% real annual returns, and income-generating real estate also outperformed, helping investors preserve their wealth.

However, today’s real estate market faces unique challenges. With mortgage rates hovering above 6.3% and unlikely to fall significantly even as the Fed cuts rates, property investments require careful consideration. It’s bond market investors—not the Fed—that control mortgage rates, which track the 10-year Treasury yield more closely than short-term rates. This means real estate investors should focus on properties with strong cash flow rather than betting on rate relief.

High-quality rental properties and real estate investment trusts that can raise rents with inflation remain attractive, especially those in sectors less sensitive to interest rates like industrial and multifamily housing.

Avoid Holding Cash and Bonds

Stagflation is particularly cruel to savers, especially those who have grown to expect historically high rates in their certificates of deposit and money market accounts. “You know, you’ve been getting about 4% in money market funds. So why even take the risk?” Ricchiuti said, explaining why many people have been skittish to diversify beyond these accounts in recent years. “All of a sudden those will drop precipitously,” given expected changes in the Fed funds rate.

Soon, those falling rates could be doing battle with rising inflation. That’s why El-Erian argues that holding cash during high inflation guarantees you’ll lose money in real terms.

Long-term bonds face a double whammy. Not only would inflation eat away at your fixed payments, but rising interest rates also crush their market value. If you bought a 10-year bond paying 3% and rates jump to 6%, nobody wants your lower-paying bond—so its value plummets if you need to sell before maturity.

Instead of sitting on cash or bonds, experts recommend keeping just enough cash for emergencies (three to six months of expenses) and shifting the rest into investments that can keep pace with rising prices. This means dividend-paying stocks from stable companies, short-term bonds that can be rolled over at higher rates, and tangible assets like commodities or real estate.

The key is staying flexible. Even a conservative mix of defensive stocks and inflation-protected securities beats watching your savings slowly evaporate.

The Bottom Line

During periods of stagflation, the best way to protect your money is to spread out your investments and focus on assets that hold up well as prices rise. Economists suggest gold, real estate, short-term bonds, and dividend-paying stocks in stable sectors over risky growth stocks or long-term bonds. The most important thing is to stick to your plan, regularly check your investments, and make adjustments based on changing conditions rather than emotions.