Stagflation – A Nightmare on Wall Street

In the next few weeks, you’re going to start seeing the word stagflation a lot in the media. I’m writing this now so my readers can be ahead of the curve, and so you can be educated on the topic.

Stagnation plus inflation equals stagflation. Basically, a challenging economic scenario, characterized by economic stagnation, high inflation, and rising unemployment. We’ve seen it happen in the past, most notably in the United States, during the 1970s, and it’s a situation that’s not too favorable for most investors. As the time-honored adage suggests, history may not repeat itself verbatim, but it certainly echoes. Therefore, let us explore what lessons we can glean from our past.

The stock market during stagflation: 

Historically, we’ve seen that investments in equities tend to see lower returns during such periods. For instance, during the 1974 stagflation episode, the S&P 500 fell by a staggering 40%. Moreover, US Treasuries and government bonds also provided negative returns when adjusted for inflation. Therefore, it’s evident that having your entire portfolio in the stock market during stagflation may not be the wisest decision. Hence – A Nightmare on Wall Street.

Gold prices during stagflation:

During past stagflation periods, gold prices have typically risen. During the 1970s gold prices surged over 1,000%. Investors turned to gold as a store of value and a hedge against inflation. As inflation eroded the purchasing power of paper currency, gold became an attractive alternative for investors seeking to protect their wealth. It’s important to note, while gold has demonstrated resilience during past stagflation periods, various factors can influence its performance in any given economic environment.

Commodity prices during stagflation:

Commodity prices have generally increased in the past during stagflation, including the 1970’s in the United States. A series of factors contributed to the rising commodity prices. These factors included supply shocks, such as the 1973 OPEC oil embargo and crop failures, which drove up prices for oil and agricultural commodities. High inflation and a weaker US dollar also contributed to the upward pressure on commodity prices. Similar to gold, investors often seek commodities as a hedge against inflation as commodities tend to maintain their value or even appreciate when paper currency loses purchasing power.

It’s essential to recognize that historical patterns may not always predict future outcomes. Various factors, such as geopolitical events, weather patterns, or changes in supply and demand dynamics, can influence all prices in any given economic environment.

So, what’s the solution? 

I believe that diversifying into commercial real estate can be a smart move in such an environment.

First and foremost, commercial real estate provides a hedge against inflation and having an asset that can appreciate in value when there is a threat of stagflation can help protect your wealth. Commercial properties tend to increase in value with inflation, as rents and property values generally rise along with the cost of living. Thus, as an investor, you have the opportunity to benefit from the rising income streams and potential appreciation in property value, helping you maintain your purchasing power.

Commercial real estate investments can be less correlated to the stock market, providing a means of diversification for your portfolio while offering a relatively stable and predictable income stream. By including commercial properties in your investment mix, you can potentially reduce the overall risk of your portfolio and enhance its long-term performance. In other words, when stock markets are not performing well due to stagflation or other economic factors, your commercial real estate investments can help offset some of the losses in your equity holdings.

It’s crucial to emphasize that commercial real estate is a diverse asset class with varying performance across property types, sectors, and geographic regions. The impact of stagflation on commercial property prices can vary greatly depending on these factors. Therefore, while there may be some general trends, the performance of commercial real estate during stagflation in the 1970s was not uniform across the board and I believe the same will happen this time around. The performance of an office building compared to a multifamily property will vary greatly, even if both assets are in the same city.

I understand that investing in commercial real estate may seem intimidating, especially for those who are new to the sector. However, there are various ways to gain exposure to this asset class without taking on the responsibilities of direct property ownership. One such option is investing in real estate investment trusts (REITs), which are publicly traded companies that own and manage commercial properties. However, I prefer participating in private real estate investment offerings.

In these private offerings, multiple investors pool their capital to acquire and manage commercial real estate properties, with each investor owning a proportionate share of the investment. By investing in syndications or a fund, individuals can benefit from the expertise of experienced sponsors or operators, who handle property acquisition, management, and disposition on behalf of the investment group.

This allows investors to reap the potential rewards of commercial real estate, such as cash flow, appreciation, and tax benefits, without the burden of day-to-day property management. Moreover, these private offerings enable investors to diversify their portfolios across various property types and geographic regions, reducing the overall risk associated with concentrating on a single asset. Overall, private syndications offer a practical avenue for investors to access the commercial real estate market and capitalize on its potential returns, while minimizing their direct involvement in property ownership and management.

This information is not intended as investment advice and is provided for educational purposes only. Historical performance is not always indicative of future results.