Stagflation anxiety is making a comeback, and for financial advisors and RIAs, the implications demand close attention. The combination of slowing growth and stubbornly high inflation poses one of the toughest market environments for investors and policymakers alike. For clients, stagflation creates both portfolio challenges and behavioral hurdles, as it tends to erode confidence in traditional strategies.
Over the past few months, Wall Street’s concerns about stagflation have ebbed and flowed, but recent data suggests the risks are rising again. The evidence is mounting: labor market weakness, persistent inflationary pressures, and ongoing tariff-driven cost increases are pushing stagflation back into the spotlight.
For advisors, the prospect of stagflation is more than just a macro headline. It’s a scenario that complicates asset allocation, challenges diversification principles, and requires a reassessment of how to balance client portfolios for both growth and preservation.
Why Stagflation Matters for Wealth Managers
Stagflation is often described as the worst-case economic scenario. Unlike a standard recession, where the Federal Reserve can cut interest rates to spur growth, stagflation ties policymakers’ hands. With inflation still elevated, the Fed has limited room to ease without reigniting price pressures. The result is an extended environment of muted growth, higher costs, and elevated market volatility.
Bank of America recently described the Fed’s policy outlook as “bimodal,” meaning two very different outcomes remain possible: one where inflation retreats and growth stabilizes, and another where stagflation takes hold. Meanwhile, BCA Research has warned about the risk over the next year, citing tariffs and cost pressures as accelerants.
Peter Berezin, BCA’s chief global strategist, summed it up directly: “Over a 12-month horizon, we are more concerned about the ‘stag’ part than the ‘flation’ part of stagflation.” His view reflects what many advisors already sense—slowing growth dynamics may prove harder to manage for client portfolios than lingering inflation alone.
Warning Signs Advisors Should Watch
While the stagflation debate remains unsettled, several data points over the past month have strengthened the case for caution. For advisors, these signals serve as reminders to stress-test client strategies and prepare for a range of outcomes.
1. Payroll Growth Stalled
The U.S. labor market continues to show cracks. August payroll data revealed just 22,000 new jobs added—far below the 75,000 economists expected, and weaker than the prior month’s 79,000 increase.
“Job growth is clearly signaling a slowdown in the economy,” said Kevin O’Neil, senior research analyst at Brandywine Global. He noted that even with questions around data accuracy, the latest BLS report aligns with other private surveys pointing to labor market softening.
For advisors, weaker employment trends signal both slower consumer spending ahead and heightened client anxiety. When job creation falters, consumer confidence often follows, which can affect everything from equity market sentiment to small business growth.
2. Private Sector Hiring Missed the Mark
The ADP private employment report reinforced the weakness. Employers added just 54,000 jobs in August, well below the 75,000 economists expected and less than half the 106,000 added the previous month.
Scott Anderson, chief U.S. economist at BMO, put it bluntly: “The evidence of significant labor market slowing continues to mount.”
This is particularly concerning for RIAs serving high-net-worth clients who derive wealth from business ownership. Slowing private-sector hiring often coincides with profit margin pressure, weaker capital investment, and potential layoffs—all of which can filter down to client portfolios and planning conversations.
3. Unemployment Ticked Higher
Jobless claims also rose. New applications for unemployment benefits climbed to 237,000 for the week ending August 30, the highest since June. The unemployment rate edged up to 4.3%, from 4.2% the prior month.
Although unemployment remains historically low, it now sits at its highest level since 2021. That incremental move upward can shift market psychology and serve as an early warning sign of broader labor market stress.
Advisors should prepare for clients to grow more concerned about job stability, even if they themselves aren’t directly impacted. In times of heightened financial insecurity, advisors play a critical role in reinforcing long-term plans and discouraging reactive portfolio decisions.
4. Manufacturing Slumped as Costs Climbed
The Institute for Supply Management’s Manufacturing PMI registered 48.7% in August, marking the sixth consecutive month of contraction. Meanwhile, the Prices Index came in at 63.7%, signaling rising input costs.
Steel and aluminum—already impacted by tariffs—were specifically cited as pressure points. These rising costs erode profitability for manufacturers and add to inflationary persistence.
For advisors, the manufacturing data highlights two risks: shrinking corporate earnings in industrial sectors and ongoing input-driven inflation. Portfolios tilted toward cyclical industries may require reassessment if stagflationary pressures persist.
5. Services Inflation Remained Elevated
The ISM Services PMI’s Prices Index came in at 69.2%, just shy of last month’s 69.9% reading and the second-highest since 2022. The index has now been above 60% for nine straight months, underscoring ongoing price pressures in services.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted that while wage growth and subdued demand may keep services inflation contained for now, risks are tilted to the upside.
For advisors, this is a key signal. Services inflation is closely tied to consumer spending and often proves sticky, meaning it may not ease quickly even if goods prices stabilize. Elevated services inflation complicates the Fed’s job and keeps client portfolios exposed to interest rate volatility.
Implications for Client Portfolios
With stagflation fears rising, advisors should reassess positioning across equities, fixed income, and alternatives. The traditional 60/40 portfolio mix may face headwinds, as both stocks and bonds can struggle in a stagflationary backdrop.
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Equities: Growth-oriented equities typically underperform in low-growth, high-inflation environments. Dividend-paying stocks, defensive sectors like utilities and healthcare, and companies with strong pricing power may offer relative resilience.
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Fixed Income: Rising inflation erodes real returns on bonds, while slowing growth makes credit riskier. Shorter-duration bonds, TIPS, and high-quality investment-grade exposure may provide better protection than long-duration Treasuries or high-yield credit.
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Alternatives: Real assets such as commodities, infrastructure, and select real estate can serve as hedges against inflation. Gold and other precious metals often attract flows during stagflation concerns. For advisors managing accredited investors, private credit and real asset strategies may help diversify exposures.
Behavioral Finance Challenges
Beyond the technical allocation decisions, stagflation raises behavioral challenges for clients. Rising unemployment headlines and persistent inflation reports can fuel anxiety, leading investors to question long-term strategies. Advisors should be prepared to emphasize discipline, communicate portfolio rationale clearly, and provide historical perspective.
For example, stagflation in the 1970s created a prolonged period of investor frustration, but diversified strategies and disciplined rebalancing helped clients weather the storm. Drawing on these lessons can reinforce trust during uncertain times.
Strategic Conversations Advisors Should Have Now
As stagflation risk rises, wealth managers should engage clients proactively. Key talking points include:
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Stress-testing portfolios: Demonstrate how current allocations perform under different scenarios, including stagflation.
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Discussing inflation hedges: Review whether portfolios have sufficient real asset exposure to offset inflation risk.
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Liquidity planning: Ensure clients have adequate liquidity for short-term needs, reducing the temptation to sell long-term assets during downturns.
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Revisiting risk tolerance: Confirm whether clients’ risk appetite aligns with potential volatility ahead.
The Road Ahead
Whether stagflation takes hold or not, the very fact that it’s back on the radar should serve as a call to action for advisors. The labor market is weakening, inflation remains sticky in key sectors, and tariffs are raising costs—all ingredients for a challenging economic cocktail.
For wealth managers, the task is twofold: position portfolios to withstand a stagflationary environment while keeping clients focused on long-term objectives. That means blending defensive allocation strategies with proactive communication, ensuring clients remain confident even if the headlines grow darker.
As Bank of America and BCA Research both underscore, the path forward looks uncertain. Advisors who prepare today—through careful portfolio construction, thoughtful planning, and clear client education—will be better positioned to guide investors through whatever comes next.
