Nouriel Roubini held multiple positions on the international economic stage and varying responsibilities over the last couple of decades, ranging from advisor roles with the International Monetary Fund, Federal Reserve, and World Bank to even holding the title of senior economist during the Clinton administration. However, he might be most well known in the financial community for accurately predicting the financial crisis of 2008, earning him the nickname Dr. Doom.
And he is ringing the alarm again.
Dr. Doom calls his shot
In an op-ed released on Oct. 3, Roubini provided an in-depth explanation of why he is worried the coming years could resemble a combination of the stagflationary 1970s and the Great Recession. Like his peers, Roubini is worried the Federal Reserve's battle with inflation will fall miserably short, while the chances of a soft landing that can tame inflation and keep the economy in good shape are dwindling.
Instead, Roubini thinks the economy is in store for a hard landing by the end of this year. Loose monetary policy enacted at the beginning of the COVID-19 pandemic accelerated the economy to levels not seen before. Now, it's slamming the brakes, and that could bring markets down even further.
The combination of inflation, higher interest rates, supply chain issues stemming from China's "zero-COVID" policy, and haywire energy prices as a result of Russia's invasion of Ukraine makes the possibility of a soft landing near impossible. To add more doubt to the equation, Roubini pointed out the U.S. hasn't achieved a soft landing when inflation was over 5% and the unemployment rate was under 5% since World War II.
So, how bad does he think this landing will be? Well, Dr. Doom sees a combination of stagflation (high prices and low growth that similarly plagued the 1970s) and a debt crisis similar to the Great Recession unfolding, ultimately making a hard landing "the baseline scenario."
Preparing for the worst
If Roubini is right, then what should investors do? In his baseline scenario, he sees stocks falling anywhere from 30% to 40% or more, and bonds might not be the traditional safe haven they used to be. To adequately prepare, it's vital investors know what their time horizon is.
If you're a younger investor with time on your side, your strategy shouldn't change too much. De-risking your portfolio is important, but that should should be less of a concern if you're only investing in companies with solid fundamentals that you plan on holding for at least five to 10 years. It's more than likely your favorite companies will be "on sale" as their stocks struggle due to the macro environment, and this can be a great buying opportunity to solidify your portfolio at a lower cost basis.
Now, for the investor who doesn't have time on their side, make sure you prepare for a worst-case scenario. Consider the performance of a traditional 60/40 allocation in the 1970s. If 60% of your portfolio was dedicated to the U.S. stock market through an index like the S&P 500, and 40% was invested in 10-year Treasury bonds, you would have seen an annual return of 6.3%. That's not bad, but it wouldn't have kept up with inflation.
To maximize potential during a stagflationary environment, a portfolio more focused on stocks and inflation-resistant assets like gold would have produced better returns. Over the same period (1972 to 1981), a portfolio with 35% stocks, 50% bonds, and 15% gold would have produced an annualized return of 9.7%. Following this strategy, an investment of $10,000 in 1972 would have kept pace with inflation and been worth around $25,000 by 1981.
Furthermore, portfolios can improve their performance by investing across a range of stocks in particular sectors. Some of the traditional inflation-resistant sectors are commodities and consumer staples since they enjoy more consistent demand.
Investing in exchange-traded funds (ETFs) that provide broad exposure to a sector can be the simplest and most effective option. There are ETFs that specifically track commodities, gold, or even inflation-protected bonds.
No one has a crystal ball that can predict the future exactly, not even Dr. Doom. But in times like these, there are still ways to set up your portfolio for success, even if returns aren't at the pace investors have grown accustomed to in the last decade. Taking the extra time to prepare today can protect you against possible losses tomorrow.
