![]() ![]() The market response to such overheating would then depend on how central banks react. WSJ’s Telis Demos explains the benefits of diversifying your investment portfolio. ![]() If you’re picking just a couple of stocks for your whole portfolio, you’re not investing-you’re trading. The resulting growth would be associated with persistent above-target inflation, disproving central banks’ belief that price increases are merely temporary. With unspent savings and pent-up demand already high, the continuation of ultra-loose monetary and fiscal policies would boost aggregate demand even further. The second scenario involves “overheating.” Here, growth would accelerate as the supply bottlenecks are cleared, but inflation would remain stubbornly higher, because its causes would turn out not to be temporary. to foreign markets (Europe, Japan, and emerging markets) and from growth, technology, and defensive stocks to cyclical and value stocks. In equities, there would be a rotation from U.S. In this rosy scenario, inflation would subside, keeping inflation expectations anchored around 2%, bond yields would gradually rise alongside real interest rates, and central banks would be in a position to taper quantitative easing without rocking stock or bond markets. ![]() “Faced with a debt trap and persistently above-target inflation, they will almost certainly wimp out and lag behind the curve, even as fiscal policies remain too loose. Then growth would accelerate while inflation would fall.įor markets, this would represent a resumption of the “reflation trade” outlook from earlier this year, when it was hoped that stronger growth would support stronger earnings and even higher stock prices. Once it fades, so, too, will the supply bottlenecks, provided that new virulent variants do not emerge. According to this view, the recent stagflationary episode is driven largely by the impact of the delta variant. Wall Street analysts and most policy makers anticipate a “Goldilocks” scenario of stronger growth alongside moderating inflation in line with central banks’ 2% target. The four scenarios depend on whether growth accelerates or decelerates, and on whether inflation remains persistently higher or slows down. Has been modest so far, perhaps reflecting hopes that the mild stagflation will prove temporary. Have fallen in the last few months and the recent equity-market correction The recovery in the first half of 2021 has given way recently to sharply slower growth and a surge of inflation well above the 2% target of central banks, owing to the effects of the delta variant, supply bottlenecks in both goods and labor markets, and shortages of some commodities, intermediate inputs, final goods, and labor. ![]()
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