Markets and Economy

Above the Noise: Stagflation fears and election years

The U.S. Capitol building illuminated against a dark sky in Washington, D.C.
Key takeaways

Today’s unemployment and inflation environment is a far cry from what it was in the 1980s’ stagflationary years.

Election volatility?

Median stock market volatility in year four of an election cycle is essentially the same as it is in years one and three.

US debt

China has been reducing its exposure to US Treasuries for over a decade without incident to the US Treasury market.

We’re a society that’s prone to hyperbole. No sooner had I grown accustomed to the panic over “hyperinflation” than I was told of the forming “economic hurricanes.” Now it’s stagflation? Hyperinflation and economic hurricanes at the same time? Make it stop!

Instead of immediately exaggerating the situation, let’s instead define what most people probably mean right now by “stagflation.” The US economy will moderate, as the Federal Reserve (Fed) has wanted, while the inflation rate remains modestly above the Fed’s “comfort zone” (delaying rate cuts by a few months). I’d argue, with respect to Saturday Night Live’s Linda Richman, that today’s stagflation is proving to be neither stag nor flation. Discuss.

The situation I just described is a far cry from the 1980s, a time when the US unemployment and inflation rates peaked at 10.8% and 14.7%, respectively.1 Currently, the unemployment rate is 3.9%, and the inflation rate is 3.4%, adding up to a current misery index that is below the historical average, not setting record highs.2 Also, in the late 1970s and early 1980s, the monetary policy authorities had seemingly lost all credibility. Inflation expectations over the next five to 10 years climbed, at one point, to nearly 10%.3 Now, the bond market’s expectation for inflation over the next 3-, 5-, and 10-year periods is below 2.4%.4

I, for one, will be holding off on getting my acid-washed jeans and boat shoes out of the closet. 

It may be confirmation bias but…

…the US equity market has historically performed well when the Fed has been on hold for an extended period following the last interest rate hike. In fact, the longer they have been on hold, the better it generally seems to have been for markets (with 2000 being a notable exception).5 For all the questions asking whether they will or won’t and when and by how much, the S&P 500 Index has risen 17.7% since the last rate hike over 200 days ago on July 26, 2023.6 Strong nominal growth and no rate cuts are likely preferable to weak growth and multiple rate cuts.

Is it that time again?

Stop worrying about election years. The US stock market has generated an average gain of 7% in election years.7 Yes, that’s a far cry from the average 17% return in year three of an election cycle.8 The more modest year-four return, however, is skewed lower by the market’s performance during the 2000 Tech Wreck and the 2008 Global Financial Crisis, both of which had nothing to do with the election. There are plenty of election years in which the market generated double-digit gains, including 1964, 1972, 1976, 1980, 1988, 1996, 2012, and 2020.

That’s not all. The market isn’t necessarily more volatile in election years, either. The median volatility in year four of an election cycle is essentially the same as it is in years one and three.9

Instead, it has been year two of election cycles that have historically resulted in greater volatility. Maybe it has something to do with the sheer coincidence of the Fed raising interest rates in 1994, 2006, 2018, and 2022.10

Seasonal angst

A family member recently called me asking me to opine on a mid-year outlook that they have read calling for a near-term 10% decline in the market. Didn’t this mean that he should “sell in May and go away”? To say that the question was like nails on a chalkboard would be an understatement (as well as dating myself).

  1. There have been 10% corrections in the S&P 500 Index in 14 of the past 25 years.11
  2. Selling in May and going away has not been good advice for long-term investors. I’ve run the numbers.12
    1. A $1,000 investment in the Dow Jones Industrial Average in 1926 was worth $7.4 million at the end of 2023.
    2. An investor who sold every May and bought back in at the beginning of November had $2.6 million at the end of 2023.
    3. Per this example, selling in May and going away over the past century has been a nearly $5 million mistake!
  3. Mild recessions have typically been associated with 20%-25% declines. The US equity market has typically recovered within a year or two.13 A 10% decline, on the other hand, would perhaps correspond to a decelerating but still resilient economy. In other words, perhaps the “soft landing” that many are anticipating. 

Since you asked (Part 1)

Q: Isn’t the US beholden to China to fund our debt? What is going to happen when China no longer wants to fund our debt?

A: This is one of those myths that won’t go away. It’s on par with the belief that humans only use 10% of their brains or that it takes seven years to digest gum.

China owns $775 billion of the US’s $345 trillion debt. That’s 2.2%, which is on par with the amount of US debt held by US insurance companies. No one seems overly concerned that the US is beholden to big insurance. But that’s not all. Chinese ownership of US debt peaked in September 2013 at $1.3 trillion. The Middle Kingdom has been reducing its exposure to US Treasuries for over a decade without incident to the US Treasury market.14 (Read more about the risk of US national debt to investments.)

Next month, I’ll debunk the theory that Twinkies can survive a nuclear war.

Since you asked (Part 2)

Q: If you believe that the Fed isn’t politicized, then why have they never raised rates between June and November in an election year?

A: That sounds like there could be something to it, but it’s not true. The Fed raised rates in September 2004.15

Automate my job?

There’s a video that went viral showing a prominent economic adviser struggling to explain why the US borrows money to fund its obligations rather than just print the money. I posed the question to ChatGPT— the artificial intelligence-driven chatbot — and assessed the response.

A: The US borrows money through issuing bonds to fund government operations because simply printing money can lead to inflation and devalue the currency. Borrowing allows the government to manage its debt more effectively and maintain stability in the economy. Additionally, borrowing allows the government to control interest rates and access capital from investors worldwide.

That’s not bad, ChatGPT, but I think we can do better. Here’s what I would have said:

Debt is a transfer of wealth from someone to someone else. For example, if I have too much money accumulating in my sock drawer then I can choose to lend it to the federal government to put it to use. For my efforts, I can expect to be paid at a select maturity date plus interest.

On the other hand, printed money is wealth created from scratch. It’s not money that has been accumulating in a sock drawer. It’s money that appears out of nowhere that makes the money in the sock drawer worth less. In short, it’s inflationary.

It was said

“The truth is that if you had to pick a time to be alive in the past few hundred thousand years of human history, it would probably be now.”

– Nicholas Kristof, New York Times Opinion Columnist

That’s my shpiel! Admittedly, I stole it from Matt Ridley, but his book The Rational Optimist came out 15 years ago. It’s an important message, especially coming from Kristof, a man who has spent most of his career covering misery. Despite the never-ending challenges and tragedies to endure, we, as Kristof points out, are living through the greatest improvements in life expectancy, nutrition, and health that have ever unfolded in one lifetime.

Everyone has a podcast

The Greater Possibilities podcast welcomed Ken Blay, Head of Research at Invesco and Ashley Oerth, Investment Strategist at Invesco, to talk about the future of bitcoin and how investors might incorporate it into their portfolios.

Here are my takeaways:

  • Focusing on the purpose of bitcoin may be missing the point. Bitcoin attracts investors because it is supply-limited, highly secure, and has had very tempting price cycles.
  • When assessing how bitcoin fits into a portfolio, investors should view it as a speculative asset. That is because it is still indeterminate what drives the price of it and its correlations to other asset classes have varied significantly over time.
  • Historically, sizeable exposure to bitcoin hasn’t been required to add risk and return potential to the portfolio. There is, however, a point where the incremental risk exceeds the incremental benefit.
  • Exchange-traded funds (ETFs) have emerged to offer investors a secure and cost-effective way to access bitcoin and other cryptocurrencies.

On the road again

My travels this month took me to Las Vegas to Barron’s Top Teams conference, where I was interviewed by Jack Otter about opportunities in the global financial markets. Minutes before we were to appear on stage, Jack asked me to be ready to offer a piece of advice to the audience. It could be about anything. I was spared when we ran out of time.

Still, I’ve thought about what I would have said. “View the country as you experience it and not as the traditional and social media would have you see it.” Americans describe the country as “divided,” “polarized,” and “fractured.”  A movie called Civil War, which takes place in modern-day America, has topped $100 million at the box office. The Wall Street Journal said the movie is “more real than you suspect.” NPR asked if it is closer to reality than we think. Fractured? A civil war? Are these our experiences or what we see on our social media feeds?

It's not the America that I’ve experienced, as I’ve crisscrossed this nation, entirely without incident. My experiences include meeting good people from different backgrounds and with different political affiliations. I’ve enjoyed breaking bread with each of them, even the Philadelphia sports fans! I’m not naïve about our challenges. How could I be? The media reminds me of them all day long. Nonetheless, until proven otherwise, I choose to view the country as I experience it and not as my social media feed wants me to. So far, I haven’t been disappointed.


  • 1

    Sources: US Bureau of Economic Analysis, 12/82, and US Bureau of Labor Statistics, 3/80.

  • 2

    Sources: US Bureau of Economic Analysis and US Bureau of Labor Statistics, 3/31/24.

  • 3

    Source: University of Michigan, 4/30/24. Survey question: What about the outlook for prices over the next 5 to 10 years? Do you think prices will be higher, about the same, or lower, 5 to 10 years from now? By what percent per year do you expect prices to go up, on average, during the next 5 to 10 years? The median response peaked at 9.7% on 3/31/80.

  • 4

    Source: Bloomberg L.P., 5/15/24. Based on the 3-year, 5-year, and 10-year inflation breakeven. The breakeven inflation rate is calculated by subtracting the yield of an inflation-protected bond from the yield of a nominal bond during the same period.

  • 5

    Sources: Bloomberg L.P. and US Federal Reserve, 5/14/24. The dates of the hold periods are: 2/24/89 to 6/2/89, 7/6/95 to 12/18/95, 5/16/00 to 1/2/01, 6/29/06 to 9/17/07, 12/19/18 to 7/30/19, and 7/26/23 to Current (5/14/24).

  • 6

    Source: Bloomberg L.P., as of 5/15/24.

  • 7

    Source: Bloomberg L.P., 12/31/23. Based on the annual returns of the S&P 500 Index from 1957 to 2023.

  • 8

    Source: Bloomberg L.P., 12/31/23. Based on the annual returns of the S&P 500 Index from 1957 to 2023.

  • 9

    Source: Bloomberg L.P., 12/31/23. Based on the CBOE Volatility Index® (VIX®) from 1989 to 2023. The median volatility in years 1, 3, and 4 on election cycles was 17. The median volatility in year 2 of election cycles was 22. The VIX is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

  • 10

    Source: US Federal Reserve, 4/30/24.

  • 11

    Source: Bloomberg L.P., 12/31/23. Based on the S&P 500 Index. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

  • 12

    Source: Bloomberg L.P., based on the growth of $1,000 in the Dow Jones Industrial Average Index comparing a buy and hold vs. selling every May, investing in US Treasury bills, and buying again in November.

  • 13

    Source: Bloomberg L.P., 8/31/23. Based on recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020. Indexes cannot be purchased directly by investors. Past performance does not guarantee future results.

  • 14

    Source: US Treasury, 3/31/24.

  • 15

    Source: US Federal Reserve, 4/30/24.