Goldman Sachs says 'stagflation' is here — and warns what it could mean for markets

Published Wed, Mar 16 20228:30 PM EDTUpdated Thu, Mar 17 20224:07 AM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Top Goldman Sachs strategist Christian Mueller-Glissmann says the economy has reached " stagflation ," and explains what this could mean for markets. Mueller-Glissmann, Goldman's managing director of portfolio strategy and asset allocation, said stagflation makes it hard to buy any dips in asset prices. Stagflation refers to a situation first identified in the 1970s in which inflation is high, economic growth slows and unemployment remains consistently high. "We have a major regime shift here on the macro, we're dealing with stagflation. And in the last 300 years, there were like two major inflationary events, which were wars and pandemics and we have both of those within a matter of two years," he told CNBC's "Squawk Box Europe" on Tuesday. He said whether to buy stocks on the dip depends on two conditions. The first is "symmetry," where there is less downside versus upside, but this is hard to assess given the current lack of equilibrium between supply and demand for goods, according to Mueller-Glissmann. The second condition is favorable momentum, either in growth or in monetary policy, he added. "Growth momentum is starting to crumble because you're seeing the kind of demand destruction from the energy crisis, you see financial conditions tightening, so there's a lot of concern with regards to growth," said Mueller-Glissmann. Sanctions imposed on Russia in response to its invasion of Ukraine have caused a backlash against Russian oil — though the country is one of the world's biggest crude exporters. As a result, oil supply is tight, and some say this is set to cause an oil crisis similar to those seen in the 1970s . In terms of policy, Mueller-Glissmann said: "If you look at policy, we don't get much support there on the central bank side because they're fighting inflation." The European Central Bank has raised its inflation outlook for the year to 5.1%, up from 3.2%. "Then it comes down to the Russia-Ukraine crisis and of course we're all watching the news flow hoping for something better, but there doesn't seem to be much progress. So, net-net I understand why it's difficult to see stabilization [in the] markets, because you just don't have much to go with," Mueller-Glissmann added. On the effect of rising oil prices, Mueller-Glissmann warned of a bumpy ride to come. Last week, Goldman laid out oil price scenarios that could unfold as the Russia-Ukraine war continues, raising its spot price prediction for Brent crude to $135 per barrel and its 2023 forecast to $115 per barrel. "If you look at the correlation between the equity market and oil prices, it's deeply negative," Mueller-Glissmann said. "Higher oil prices will weigh on growth and that in turn will weigh on equities and the sad story is that becomes a bit self-fulfilling. Because the more equities are under pressure the more you're tightening financial conditions the more it weighs on growth and you create a vicious cycle between markets and the economy, between commodities and equities ... If we go to 135 [dollars a barrel] in a violent way, without any positive growth newsflow, then of course I think you have a tough time ahead of you." — CNBC's Sam Meredith and Hannah Miao contributed to this report.

Brendan McDermid | Reuters

Top Goldman Sachs strategist Christian Mueller-Glissmann says the economy has reached "stagflation," and explains what this could mean for markets.