Stagflation fears overblown, Wall Street strategists say

Market expert on 3Q earnings: US expecting a less great season

UBS Managing Director and Senior Portfolio Manager Jason Katz argues there may be volatility ahead of us.

Wall Street strategists say mounting concerns over stagflation are a good opportunity to buy the dip stocks.

Stagflation, which is typically defined as a period of inflation with declining economic output, was the most common word Goldman Sachs clients brought up this week. 

"Stagflation is not our economists’ base case expectations," wrote David Kostin, chief U.S. equity strategist at Goldman Sachs. 

GOLDMAN CUTS FORECAST FOR US ECONOMIC GROWTH IN 2021 AND 2022

The S&P 500 fell 5.2% from Sept. 2 through Oct. 4 amid concerns regarding lofty valuations amid a backdrop of supply chain disruptions and labor shortages that developed in the wake of COVID-19. 

TickerSecurityLastChangeChange %
SP500S&P 5004361.19-30.15-0.69%

The supply chain and labor issues along with trillions of dollars of fiscal and monetary stimulus have resulted in the consumer price index rising 5.3% year over year in September, near the hottest pace in 13 years. That backdrop, along with concerns over slowing growth, has sparked talk that the U.S. is entering a stagflationary environment, the likes of which has not been seen since the 1970s. 

However, many Wall Street economists, like the Federal Reserve, say pricing pressures are likely to ease in the months ahead as supply chain bottlenecks are alleviated. 

Others say we are nowhere near the stagflation that was seen when Jimmy Carter was in the White House.

"If ‘stagflation’ means ‘the 1970s,’ a time of wage-price spirals and high unemployment, this clearly isn’t it," wrote Morgan Stanley strategist Andrew Sheets.  

Still, a Deutsche Bank survey published Monday found 74% of more than 600 respondents worried that rising inflation/bond yields pose the biggest threat to market stability. 

Sixty-three percent of respondents think there will be another 5% to 10% pullback in the S&P 500 while another 8% feared a steeper decline. 

But Wall Street is mostly on board with the idea that the current pullback represents a buying opportunity. 

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"Despite near-term uncertainty we expect the equity market will continue to rally as investors gain confidence that the current pace of inflation is ‘transitory,’" Goldman Sachs’ Kostin wrote. "We believe this dip will prove a good buying opportunity, as 5% pullbacks usually have in the past."

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