Stagflation - a situation in which economic growth freezes while inflation rages - is relentless. Researchers at Robeco Institutional Asset Management in Rotterdam recently found that from 1875 to 2021, stocks lost almost 17% a year on average, after inflation, during stagflationary periods.
When you look back, you recreate the past
However, it is important to understand that when we look back on the past, we are not recapturing it; We recreate it. We make it into something it never was: clear from the start.
The stagflation of the past, so clear to us now, was obscure then. The inflation rate dropped sharply in 1971-1972 and once more in 1975-1976, before ramping up in 1979. Economic growth was zero in 1970; It turned negative in 1974 and 1975 and again in 1980 and 1982, but exceeded 4% in five years in the 1970s.
Like the house of mirrors in an amusement park, hindsight distorts other facts.
Today, when we know that the price of oil soared during that period (crude oil went from less than $3 a barrel to more than $39 between 1966 and 1980), it is safe to say that the energy industry dominated the list of best performing stocks during that period.
So that's it, no. It is true that some companies, such as Texas Oil & Gas Corp, Southland Royalty Co. and Gearhart Industries Inc were among the best performing companies.
The computer remains cheap - the stock flies into space
But the best performing stock between early 1966 and late 1982 was Tandy Corp (later known as RadioShack Corp). According to the Center for Security Price Research, Tandy returned 14,175% during that period.
And who wins second place? O'Sullivan Corp, a plastics maker that also made rubber shoe heels, yielded 4,820%.
Not far behind were media and entertainment giant Harcourt General Inc, with an increase of 3,196%; movie theater, tobacco and insurance conglomerate Loews Corp, up 3,190%; and retailer House of Fabrics Inc, up 2,916%.
How can it be? Most of the companies that turned out to be the "super stocks" of that stagflationary period did not have the ability to pass on the growing costs to their customers without losing business. Professional investors call this ability pricing power - and according to conventional wisdom, this is what companies need to have in order to thrive in periods of stagflation.
There's no doubt that Altria Group, then Philip Morris, had pricing power: smokers generally don't mind paying more over time for something they're addicted to. Also, products like tobacco and movies offer comfort in hard times. The condition of the alcohol and sugar companies was also good. However, the story is different for many other stars of that stagflationary period.
Tandy's TRS-80 desktop microcomputer was one of the first personal computers to hit the market. In a Wall Street Journal ad for the TRS-80 in 1978, Tandy emphasized its "affordability," at $599. In 1980, a much more powerful version cost only $699.
Between 1976 and 1982, Tandy's profits roughly quadrupled—not because it had pricing power, but because its business thrived in a stagnant economy.
Meanwhile, House of Fabrics, which sold sewing machines, textiles, sewing accessories and small, inexpensive items, also had weak pricing power - but it still raked in cash after consumers, reluctant to buy new clothes at ever-rising prices, began repairing old clothes at home .
Today, almost every brokerage and asset management firm around is decrying the idea that stocks with great pricing power are a panacea for stagflation.
But the price you pay for pricing power is very influential.
The market has already sent such stocks to the moon. The health insurance companies Centene Corp and UnitedHealth Group Inc, which are highly regarded by investment professionals, due to their ability to pass on price increases, are up more than 10% and 5% this year, with performances that outperform the market by more than 20 percentage points .
History never repeats itself exactly, but it is more likely that you can successfully hedge against stagflation by buying cheap stocks than by buying stocks that are already inflated.