Betting on Bonds and Bricks: How to Navigate Stagflation with Fed Policy and Tariffs

The Federal Reserve's June 2025 decision to keep interest rates steady at 4.25-4.5%—despite a revised upward inflation forecast to 3.0% for the year—has created a stark dilemma for investors. With the Fed now openly divided on whether to cut rates (seven members expect zero cuts this year), and President Trump's trade wars adding fuel to inflation, the path forward requires a dual strategy: hedge against rising prices with long-dated Treasuries and tilt toward sectors that thrive in stagflation, while avoiding growth-sensitive stocks that will suffer in a slowing economy.

The Case for Long-Term Treasuries: A Hedge Against Rate Cuts and Inflation

The Fed's Summary of Economic Projections (SEP) reveals a central bank stuck between a rock and a hard place. While inflation remains elevated due to Trump's tariffs (which now average over 15% on Chinese imports, the highest since the 1930s), the Fed has also downgraded GDP growth to 1.4% for 2025 and raised unemployment forecasts to 4.5%. This is a classic stagflationary cocktail: high prices + weak growth + rising joblessness.

Here's why long-dated Treasuries (e.g., the 30-year bond) are a must-have:
- Rate Cut Speculation: Markets now price a 70% chance of a September rate cut, but the Fed's internal divisions suggest volatility ahead. Long bonds tend to rally in such uncertain environments.
- Inflation Hedge: While traditional Treasuries don't protect against rising prices, TIPS (Treasury Inflation-Protected Securities) automatically adjust their principal for CPI changes. Pairing TIPS with long-dated nominal bonds creates a buffer against both rate cuts and inflation.

Stagflation-Proof Equities: Energy and Materials Are the New “Safe” Sectors

The Fed's inflation revisions and Trump's trade wars have reshaped the equity landscape. Sectors tied to physical assets—energy, metals, and construction materials—are now the true inflation hedges, as tariffs and supply-chain disruptions keep input costs elevated.

1. Materials Stocks: Copper, Steel, and the “New” Industrial Boom

The OECD projects U.S. GDP growth will slow to 1.6% in 2025, but materials stocks are insulated by two factors:
- Tariff-Driven Pricing Power: Steel and aluminum tariffs, now at 50%, have pushed up costs for manufacturers, benefiting producers like Teck Resources (TECK) and First Quantum Minerals (FMG).
- Global Supply Constraints: Copper—a critical material for EVs and renewables—faces a looming deficit. With aging mines and limited new supply, companies like Ivanhoe Mines (IVN) could see long-term gains.

The S&P 500 Materials Sector Index has already outperformed the broader market in 2025, rising 8% versus the S&P 500's flat performance.

2. Energy: A Double Play on Inflation and Geopolitics

Energy stocks are benefiting from two tailwinds:
- Tariff-Induced Scarcity: Canada's retaliatory tariffs on U.S. energy exports have disrupted trade flows, supporting domestic prices.
- Geopolitical Risks: Middle East tensions and China's reliance on U.S. oil (despite tariffs) mean energy demand remains resilient.

Look to Cimarex Energy (XEC) or Marathon Oil (MRO) for exposure to U.S. shale, which can scale production quickly as prices rise.

Avoid Growth Stocks: Stagflation Is Their Kryptonite

The Fed's SEP now forecasts unemployment to hit 4.6% in 2026, signaling a labor market that's no longer a growth engine. Sectors like tech, consumer discretionary, and biotech—reliant on strong economic tailwinds—will suffer.

• Tech's Downward Spiral: Rising interest rates and weaker consumer spending are already hitting margins. The Nasdaq's 2025 decline (down 5% year-to-date) hints at further pain.
• Consumer Discretionary Woes: Tariffs have raised the cost of imported goods, squeezing margins for retailers like Walmart (WMT) and Amazon (AMZN).

The Bottom Line: Build a Stagflation Portfolio

Investors should allocate 30-40% of their fixed income to long Treasuries (e.g., TLT) and 20-25% of their equity portfolio to materials and energy stocks. Avoid overexposure to growth sectors until the Fed's path—and inflation—becomes clearer.

As Fed Chair Powell said, the central bank remains “data-dependent.” But with tariffs keeping inflation stubbornly high and growth faltering, the data is screaming one thing: stagflation is here, and the smart money is moving to bricks and bonds.