With the U.S. economy on the brink of a recession, investors fear that stagflation may be a looming factor in the coming years. Stagflation occurs when there is a combination of low economic growth and a high rate of inflation. The 1970s was a decade defined by severe economic stagflation in the U.S.

Anyone who has a basic understanding of economics should not be surprised that the stock market has taken a severe hit so far in 2022. When the COVID-19 pandemic  first hit in early 2020, the stock market lost nearly half of its value as investors panicked about what the virus would do to the economy.

The federal government stepped in, and former President Trump signed the largest economic stimulus package in U.S. history to save the economy from a depression. The trillions of dollars in new spending being pumped into the economy and the Federal Reserve cutting interest rates created an environment favorable for stocks to flourish. 2021 was an easy year to be an investor, but 2022 has been a wake up call for people who thought an overheated economic bubble would not soon burst.

Although the current stock market pullback does not compare to recent major crashes, including 2000 and 2008, there is a similar sense of panic in the media with the doomsday news coverage. This leads to investors selling their stocks out of fear instead of weathering the storm. The only way to guarantee a loss during a Bear Market is to sell. A pullback in the market is an opportunity to buy at a discount. History shows that exponential growth over the long term is inevitable. The compounding interest is what turns middle class people into millionaires over the long term.

Everyone needs to have a plan that can both grow and weather the storm during a downturn. Portfolio diversification is the perfect way to ensure this. Investing in a combination of both growth and value stocks among both U.S., International, and emerging markets is a well-diversified strategy that covers all opportunities for growth and limiting losses during a recession. Growth stocks take advantage of a strong economic environment, while value stocks tend to hold their value even during economic slowdowns.

With inflation at 40 year highs and large cap stocks reporting quarterly losses to start the year, the U.S. economy is at serious risk of stagflation. This may lead to international and emerging market funds receiving more attention as investors look for more diversification. As the Federal Reserve continues to raise interest rates to combat inflation, investors should be aware that a Bear Market may be on the loom.