First up: the fear factor of the week requires a history lesson. Jack Dorsey of Twitter made waves telling his followers that “hyperinflation” is happening now. Others are trying to steal his spotlight with warnings that “stagflation” is an even bigger threat.
What’s stagflation? Economic growth below inflation is painful because you work harder and still lose ground. That’s roughly where we seem to be.
Negative economic growth . . . a recession, a stagnant economy . . . is painful. You know about that. Money stops moving and it gets harder to get anything done.
Recession / stagnation plus inflation is stagflation, the worst of both worlds. Money stops moving, but year by year it’s worth less. The longer it stays stalled, the harder it is to pull out of the tailspin and get money back to work.
That’s the misery of the late 70s in a nutshell. The Fed had to choose between keeping prices stable and providing economic support. They sacrificed the job market in order to kill inflation. It took years.
Are we going there now? I don’t think so, but the fear mongers need something to focus on. The Fed only makes a mistake once. After that, they learn never to do it again . . . they’ll lean too hard in the other direction.
This time, the Fed leaned too hard into avoiding another 2008. Mission accomplished, no banks failed. Now they’re going to blow out all the stops to get inflation back under control before it really starts to hurt 70s style.
STICK TO YOUR STRATEGY
Buy the dips. But be selective, remain alert. Every stock in your portfolio needs a purpose, especially if you’re worried about the economic environment.
Are you afraid of inflation? Buy growth stocks that can swim above the tide. And make sure you stay hedged by owning commodities and commodity producers. A declining dollar means higher oil prices, higher gas prices, stronger gold. Start there.
Are you afraid of stagnation? Maintain a strong defense. Buy income stocks that can make a little money even in a recessionary chill. Yield stocks. If the Fed goes even one step too far they’ll cap interest rates and wait for another window later.
Not growth and not income? Trade it if you like, but that’s just a pure trade you hold 3-6 months and then rotate out on the peak. It’s not part of your strategic portfolio for the next 1-3 years.
Most stocks are not growth and not income plays either. AAPL is not a growth stock any more. FB is not really a growth stock right now . . . Trade them on options or hold on for the long haul but don’t buy aggressively right now.
Obviously this is the kind of week that can flip the market from “best week in a year” to “worst market slide since the pandemic.” Everything depends on AAPL on Thursday night. Could be another 2018, could be a breath of relief.
No reason to get aggressive before that. AMZN also on Thursday night will be a sideshow. MSFT tomorrow night will be a non event . . . they’ve got it covered. GOOG tomorrow night sideshow.
MCD Wednesday will provide a little window on the consumer . . . V tomorrow night more important but will be unlikely to move the market. Good news built in.
STOCKS WE LIKE
Get your defensive line in place first. That means bond substitutes . . . Gap (GPS) is unfairly beaten up here, pays 2%. Molson (TAP) pays 3% even after a dividend cut. Its challenges are less about cans and bottles and more about shifting market share. Management will recover.
Ingredion (INGR) pays 2.7%. Newell (NWL) pays 4%. You see what all these numbers have in common: they’re higher than ambient bond yields. Don’t buy bonds until the Fed gets its act together and we can get a decent price (and a competitive yield). Buy defensive consumer stocks that will keep paying current income one way or another.
After that, stretch. Rising rates are good for the banks and lending activity is already anemic, so it’s not like they’ll starve in a slightly higher-rate world. Goldman (GS) is always interesting but I’d prefer to lock in a little more than 2% on it here. Buy the dip.