Remember stagflation? That unpleasant economic cocktail of rising prices and slowing growth that haunted the 1970s? Well, according to Goldman Sachs, something that looks suspiciously like it is starting to take shape again. The bank has been busy updating its forecasts, and the news isn't great: they've raised their outlook for U.S. inflation while simultaneously lowering their expectations for economic growth this year.
The culprit, as often seems to be the case lately, is energy. Persistent price pressures from that sector, combined with what Goldman sees as rising risks to economic activity, are painting a picture of an economy that might be stuck between a rock and a hard place. For markets, this is a particularly tricky mix. Inflation eats away at the value of money, while slowing growth puts a damper on corporate profits. So far, it looks like investors have been pricing in the inflation shock—but maybe not fully bracing for the growth slowdown that could come next. That gap between the two risks is where the real investment puzzle lies.
Inflation Hedges: The Usual Suspects Are Back in the Spotlight
Goldman's warning is pretty specific: if current disruptions stick around, U.S. inflation could hit 4.9% by this spring. That's a number that would definitely complicate the Federal Reserve's ongoing mission to guide inflation back down to its 2% target. With energy prices being a major driver of the recent inflation surprises, it's no wonder that commodity-focused investments are getting a fresh look from investors.
Broad commodity ETFs that include exposure to crude oil, as well as funds that track the energy sector directly, stand to benefit from the same supply chain issues and high costs that are pushing inflation higher. For a more direct play on oil prices, there are ETFs that track crude oil futures, like the United States Oil Fund (USO). Or, investors might look at energy sector ETFs that hold the big oil and gas companies, such as the Energy Select Sector SPDR Fund (XLE), which includes giants like Exxon Mobil Corp (XOM) and Chevron Corp (CVX).
On the fixed-income side, when you're worried about inflation eroding your returns, Treasury Inflation-Protected Securities (TIPS) are a classic defensive move. ETFs like the iShares TIPS Bond ETF (TIP) adjust their principal value in line with inflation, which can help preserve real returns when prices are climbing.
And then there's gold. It's not a direct inflation hedge in the textbook sense, but historically, it has tended to do well in environments where both inflation and geopolitical risk are elevated—and right now, both of those boxes are checked. ETFs like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU) offer straightforward exposure to bullion and are often used as portfolio stabilizers during macroeconomic shocks.
Bracing for Impact: Defensive Plays for a Growth Slowdown
If Goldman's concerns about weakening growth turn out to be right, then the more cyclical, economically sensitive parts of the stock market could be in for a rough time. Sectors like industrials, consumer discretionary, and small-cap stocks are typically more vulnerable to an economic cooldown and often see their earnings estimates get trimmed.
This is where defensive strategies come into play. Equity ETFs that focus on low volatility or high-quality stocks can offer a bit of shelter. Take the iShares MSCI USA Min Vol Factor ETF (USMV), for example. It holds stocks with more stable earnings, lower debt levels, and stronger balance sheets. Its top holdings include names like Exxon Mobil, Verizon Communications Inc (VZ), and Cisco Systems Inc (CSCO)—a mix that reflects a defensive mindset: energy (benefiting from high oil prices), telecom (with its steady cash flows), and tech infrastructure (which can show resilience through recurring business demand). The fund also has a beta of 0.76, meaning it's historically been less reactive to sharp market swings than the broader market.
Dividend-focused ETFs can also be a sensible part of positioning for slower growth. Companies with consistent profitability and strong pricing power are more likely to maintain—or even grow—their dividends even when the economy softens. Funds like the Vanguard Dividend Appreciation ETF (VIG) and the Schwab U.S. Dividend Equity ETF (SCHD) focus on exactly those kinds of high-quality companies with solid dividend track records.
