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Russia’s invasion of Ukraine has increased the risk of stagflation (slowing economic growth but high inflation). How should investors prepare for this possible scenario? Our analysis reveals which asset classes may be likely to outperform if it comes to pass.


Inflation in Each Phase of the Business Cycle

In general, there are four different phases of the business cycle based on the evolution of output: recovery, expansion, slowdown, and recession. The table below shows the average real (inflation-adjusted) total return of major asset classes for each business cycle phase during high-inflation environments.


Annualized Real Returns In High-Inflation Environments (%)

  Global equities

US 10-year

US T-Bills Commodities Gold
Recovery -6.2


-0.1 8.2 -18.4


7.4 -2.1 -1.7 16.6 6.6


-0.6 6.4 -0.2 16.7 19.3
Recession -28.1 4.0 -0.1 -1.6

Past performance does not guarantee future results. Data from May 1988 to December 2021. Notes: real returns are in excess of US Consumer Price Index (CPI, defined by the Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services). High inflation is defined as US CPI annual inflation above the 10-year average. See below for representative index definitions. Source: Schroders Economics and Strategic Research Unit.

Historically, the slowdown phase has favored investing in traditional potential inflation-hedges such as gold (+19.3%) and commodities (+16.7%). This makes economic sense: Gold is often seen as a safe-haven asset and tends to appreciate in times of economic uncertainty. Commodities, such as raw materials and oil, are a source of input costs for companies as well as a key component of inflation indices. So, they’ll also typically perform well when inflation rises (often because they are the cause of the rise in inflation). 

In comparison, the slowdown phase has proved very challenging for equities (-0.6%), as companies combat falling revenues and rising costs. Keeping your savings in cash (-0.2%), proxied via T-Bills, hasn’t been a better strategy. Although US Treasury bonds have performed well in the past (+6.4%), they should be treated with caution today. In theory, they should benefit from falling real rates, driven by declining growth. However, rising inflation eats into their income, putting upward pressure on yields and downward pressure on prices.

In practice, the extent to which this harms bond returns will depend on their duration1 and starting yields (higher yields provide a larger cushion to absorb rate rises). 


If we’re on the cusp of a period of stagflation, then a shift in performance leadership may be on the way.  


What Are the Key Takeaways for Asset Allocation?
Last year, the reflation environment favored investing in risk assets2 such as equities and commodities, while gold suffered. This is consistent with what we would expect using our previous analysis. 

However, if we’re on the cusp of a period of stagflation, then a shift in performance leadership may be on the way. In this scenario, equity returns may become more muted while gold and commodities may outperform. This is exactly what has manifested so far in 2022. 

Meanwhile, central banks are stuck between a rock and a hard place. Hiking interest rates too quickly could send the global economy into recession. But keeping rates low for too long could send inflation spiralling out of control. 

Taken together, the outcome for bonds is uncertain and will depend on the tug-of-war between inflation and growth sentiment.


Talk to your financial professional to help you stay focused during volatility.


1 Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

2 Risk assets (such as equities, commodities, high-yield bonds, real estate, and currencies) have a significant degree of price volatility.

Global Equities are represented by the MSCI World Index, a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

10-Year US Treasuries are represented by the US 10-Year Datastream Index.

US T-Bills are represented by the US 3-Month Fed Index.

Commodities are represented by the S&P GSCI Commodity Total Return Index, which consists of 24 commodity futures on physical commodities across five sectors: energy, agriculture, livestock, industrial metals, and precious metals.

Gold is represented by the spot price of gold in dollars per ounce.

Indices are unmanaged and unavailable for direct investment.

The views expressed herein are those of Schroders Investment Management (Schroders), are intended for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Schroders or Hartford Funds. 

Important Risks: Investing involves risk, including the possible loss of principal. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or in a particular geographic region or country. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall.• Obligations of US Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the US Government. • Investments in the commodities market and the natural-resource industry may increase liquidity risk, volatility, and risk of loss if adverse developments occur. 

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Insight from sub-adviser Schroders Investment Management
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Strategist, Strategic Research Group

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