An economic environment marked by high unemployment, high inflation, and low economic growth.
- When stocks tumble in times of tumult, bond prices tend to rally as investors pile into them for safety, but a traditional portfolio of 60% stocks and 40% bonds could see a “disastrous outcome” should stagflation show up, Davis warned.
- That’s partly because inflation erodes the value of bonds, typically prompting investors to sell and the result is price declines and higher yields.
- “Imagine how scary it would be for the market if we had stocks and bonds selling off together,” she said. Stagflation could pose a “major problem because central banks can’t really come to the rescue and cut interest rates .”