Lessons from the 1970s stagflation: Commodities may be among the only trades that work

With rising fears that we’re headed for a period of stagflation — high inflation coupled with slowing growth — Deutsche Bank looked back to the 1970s for a historical guide of what might work in this economic environment. The firm found that commodities might be the safest bet. “Equities generally saw losses in real terms in the 1970s, but energy was the best place to be on a sectoral basis,” the firm said this week in a note to clients. Analysts led by Henry Allen said that oil and agricultural goods were among the best places to invest during the 1970s, a decade plagued by stagflation. “That echoes what we’ve seen in 2022, where commodities are the only asset class to have seen relatively consistent gains this year,” Allen wrote. He noted that while precious metals like gold and silver also held up during the 1970s, this time around they’ve been trading within a range. “The main takeaway should be that if inflation stays high for many years, both history and today’s high starting valuations suggest it will be very difficult to generate positive real returns in most traditional financial asset classes,” the firm said. Deutsche Bank’s call comes as inflation hits the highest level in 40 years. The inability of supply to keep pace with demand as the economy rebounds from the pandemic has sent the price for goods and services soaring. The Federal Reserve also took unprecedented stimulus measures to aid the economy as the pandemic took hold, while government assistance put more money in consumers’ pockets. Now, Russia’s invasion of Ukraine has sent global energy markets spinning. The surge in oil prices, which has sent gas prices to record highs, is a major contributor to inflation. Deutsche Bank said that commodities were the sole asset class that “reliably managed to post a positive real return” over the 1970s. During the period West Texas Intermediate crude and Brent annually returned, on average, 19% and 24%, respectively. The firm said that today it could be even be harder to put a lid on inflation than it was in the 1970s due to higher debt levels and threats to globalization, among other things. Allen said that although it’s only been one year of sky-high inflation, the ultra-low inflation years of 2014 to 2020 could be in the rearview mirror. “A lot can change in the years ahead but history tells us that a decade of inflation will be very bad for asset prices, especially (but not exclusively) in real terms.” WTI and Brent are up 54% each for the year. The S & P 500, on the other hand, has lost nearly 13%. — CNBC’s Michael Bloom contributed reporting.