VGIT - Stagflation? Sticky Inflation? 7 Reasons For Investors To Be Positive

2024-05-01 12:30:00 ET

Summary

• Google searches of the term “stagflation” went up dramatically last week, but I don’t believe we’re seeing stagflation in the US.
• The recovery in eurozone services appears to have legs, in my opinion, as we are finally seeing better activity in the eurozone’s two largest economies, Germany and France.
• We saw a small bank failure with the seizure and sale of Republic First Bank, but I don’t see any contagion stemming from this failure.

The big news last week, given that the world is waiting to see when the US Federal Reserve (Fed) will begin cutting rates, was the US gross domestic product (GDP) report for the first quarter. Not only was growth lower than expected, but inflation was higher than expected. This was followed by the March Personal Consumption Expenditures (PCE) Price Index, showing both headline and core inflation for March were higher than expected. This data calls into question how sticky inflation is going to be — and how long the Fed will have to wait before it cuts rates. As a result, there was a big increase in fear — Google searches of the term “stagflation” went up dramatically, and some even argued that the next Fed action will be a hike, not a cut. In addition, we saw a small bank failure last week with the seizure and sale of Republic First Bank. But despite these concerns, I do see several reasons for investors to be positive.

1. The US is not experiencing stagflation

Stagflation (combining the words “stagnant” and “inflation”) is characterized by slow economic growth, high unemployment, and high inflation. This is not stagflation! The March PCE Price Index is below 3% with year-over-year headline inflation at 2.7% and core PCE inflation at 2.8%. ¹ And don’t forget, PCE is the Fed’s preferred measure of inflation ....

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