The economy is shifting and I don’t like it. Inflation is picking up as things will likely slow down… meaning we need to discuss how to trade stagflation.
I wrote about stagflation in Thursday’s Venture Society, and Friday’s reports confirmed my thinking.
June data showed a surprise increase in retail sales — up 0.6% versus a 0.3% expected dip — which managed to briefly boost stock prices earlier today.
Source: Bloomberg
That euphoria quickly soured, however, when the monthly University of Michigan survey data came in an hour and a half later, showing a decline in consumer sentiment and hotter-than-expected inflation.
For readers familiar with my commentary, the hot inflation should come as no surprise… I’ve been calling it for more than a year.
But apparently, inflation continues to catch the broader market off guard, and it’s being exacerbated to some degree by Friday’s monthly options expiry.
We’ve had one of these episodes of volatility literally every single month this year — the last three coinciding with options expiry — so this is nothing new.
But there is one big change this time around…
Toward the end of the month, quarterly gross domestic product data will be released, and it will be one of the largest numbers many of us will ever see in our lifetimes.
By definition, that means economic growth is going to SLOW from there on out.
There’s a term we have for periods of slowing economic growth accompanied by persistent inflation…
It’s called stagflation.
One thing to note when thinking about how to trade stagflation is that small-cap stocks don’t perform particularly well during these periods.
We’re seeing this play out right now in the Russell 2000.
Source: Bloomberg
If the Russell breaks through that trendline (represented by the diagonal green arrow), that would be a bearish short-term indicator.
And if it breaks support (represented by the horizontal gray line), then look out below.
The reason I bring this up is because a lot of the stocks and themes we discuss in Fortune Research focus on the small-cap universe.
Small-cap growth generally requires the economy to grow around it.
So if we know that growth is going to slow down, then we should allocate a smaller percentage of our overall portfolios to the small-cap universe.
Now… that doesn’t mean “go sell all of your small caps.”
It just means be careful, and at least begin to make the adjustments to weight exposure more toward middle and large caps.
We’re going to do exactly that for Fortune Research Pro subscribers over the next few months.
And if you’re not a subscriber yet, well, we would love to have you on board!
Just click here for details, a discounted rate, and access to our latest special report…
How to Trade Stagflation in the U.S.? Go Long on Automation
Although I was just a toddler in the 1970’s, I can still remember stagflation.
The little West Virginia town where I grew up felt it, whether it was long gas lines, short pocketbooks, factories closing or jobs fleeing the area for overseas destinations.
This period isn’t likely to be very much like that, but you still need to know how to trade stagflation — because we’re in it.
For one, we’ve got plenty of gasoline, especially after a year of working from home.
And in fact, we may even open some factories in the U.S.
The twist here is that when we exported all those jobs overseas all those years ago, we were essentially lowering our labor cost at the expense of American workers. And what we got in return was cheap stuff.
And now that we’re importing some of that labor back onshore, the cost of labor is going to go through the roof.
While that is likely good for wages of American workers — we’re already experiencing a shortage — those costs are always passed through to the consumer… which also happens to be the American worker.
But companies will try to find ways to alleviate the pressure and keep costs down.
And one technique they will almost certainly use… is automation.
In fact, we’re already seeing it!
McDonald’s is testing out automation of its drive-thrus.
Domino’s recently struck a deal with self-driving delivery company Nuro.
Chik-fil-A is testing automated deliveries in California with Kiwibot.
And the list goes on.
But mark my words, the same will be true of many of those factory “jobs” that are coming back onshore over the next few years.
Which makes it the perfect idea for how to trade stagflation in the U.S.
All the best,
Matt Warder
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