Wall Street is increasingly worried about stagflation.

According to the latest Brookings Financial Times tracking index, global growth showed historic momentum in early 2021, but novel coronavirus's shadow still hangs over the global economy, which is slowing.

David Kostin, chief US equity strategist at Goldman Sachs Group, wrote in his weekly "Kickstart": "stagflation is the most common word in client conversations this week because volatility in the stock market is still rising."

Although Kostin repeated that "stagflation is not the basic expectation of our economists", his economic team has just lowered its GDP forecast again while raising the inflation outlook.

Morgan Stanley also mentioned this point: "in the dialogue with investors, a term seems to appear again and again: stagflation." But then retorted: "the surge in energy prices is only temporary."

Is stagflation coming?

Recent supply shortages, rising energy prices and rising inflation have brought new problems to the global economy.

The job recovery stalled for the second month in a row in September, with falling business and consumer confidence indicating weak growth prospects, according to the latest official data.

The Brookings Financial Times Global Economic recovery tracking Index (Tiger) compares the actual activity, financial markets and confidence indicators of the global economy and individual countries with their historical averages to capture the normality of the data for the current period.

The latest biennial update shows that economic growth in developed and emerging economies has slowed sharply since March when confidence in the success of COVID-19 's vaccination has soared.

"policymakers in many major economies now face the challenge of controlling inflation while supporting growth, even if they continue to be hit by supply disruptions at home and abroad," said Eswar Prasad, a senior fellow at the Brookings Institution. .

"the surge in energy prices symbolizes the problems caused by supply disruptions that could eventually hurt aggregate demand."

Citi's global economic surprise index has turned negative and fallen to levels that have historically indicated a slowdown. When the economic accident index is positive, it indicates that the economic situation is better than expected.

Meanwhile, Citi's global inflation surprise index soared to its highest level since records began in 1999. The index measures the surprise of the inflation data relative to market expectations, which indicates that inflation is higher than expected.

However, Andrew Sitz (Andrew Sheets), Morgan Stanley's chief cross-asset strategist, is skeptical of stagflation.

He believes that if "stagflation" refers to the "1970s"-a period of wage-price spirals and high unemployment, it is clearly not now. On the contrary, what if "stagflation" is a period when inflation expectations rise and growth slows? This is a softer and easier definition to apply. But there is one problem: this situation may not last forever.

It predicts that inflationary pressures in the US and the eurozone will ease rather than spiral in the coming years from the fourth quarter.

Although stagflation has different effects on different people, in past periods of rising inflation and slowing economic growth, there is usually one thing in common: rising energy prices. As a result, cross-asset hedging stagflation is the best asset in the energy sector.

The geometry of the stock market under stagflation

Investment banks show different attitudes towards the future of the stock market.

Goldman Sachs Group believes that in the historical stagflation environment, most of the weakness in the stock market can be attributed to the pressure on corporate profit margins.

Stagflation is related to stable real income, but falling profit margins and real profits suggest that it is difficult for companies to raise prices quickly to offset rising input costs.

Goldman Sachs Group pointed out: "in the stagflation environment, the performance of industrial stocks and information technology stocks usually lags the most." The cyclicity of the information technology industry is not as cyclical as it was during the stagflation period of the late 1960s and early 1980s, because the composition of the information technology industry has shifted to software and service companies. "

Today, however, the sector's vast long-term growth pattern makes it "longer-lasting" than most other stocks and more sensitive to real interest rates.

In addition, Albert Edwards, a strategist at Societe Generale, said last week that global technology stocks had been "married" to US 30-year bond yields since the start of the year. "if the US 30-year yield rises to 2.4 per cent from the current 2.1 per cent, it will reduce the price of technology stocks by about 15 per cent."

Although the investment bank admitted that stagflation had almost arrived, Goldman Sachs Group returned to "inflation is temporary" and "the stock market will continue to rebound" and bought every fall.

At this point, there is a significant gap between Goldman Sachs Group's traditional bullish outlook and Morgan Stanley's increasingly bearish outlook, and as Morgan Stanley strategist Michael Wilson wrote last week, the stock market will fall by more than 10 per cent in the coming days.

"A large number of companies have pointed out serious supply chain problems in their performance reports." Earnings forecasts and prices are expected to fall after many reports are released. "

For the S & P 500 index at the end of the year, Goldman Sachs Group is expected to be 4700 and Morgan Stanley is expected to be 4000.