Daily Brief - Investments that go up during stagflation

TLDR

Falling growth and high inflation mean the economy is in stagflation. Investing during stagflation can be tricky but commodity and staple stocks offer compelling returns.

Image courtesy of the FT, from their recent long piece on stagflation.

It is tricky to invest during stagflation

Stagflation is the conjunction between falling growth and high inflation. With Q1 GDP being negative in the US, we’re one quarter away from an official recession.

It was only a while back that economists were expecting 2022 to be the “rebound year” from covid, harkening a new roaring 20’s decade.

Stagflation poses a serious challenge for monetary policymakers. Rise rates to combat inflation and you get a recession. Do nothing and you get a bigger problem tomorrow.

Stagflation challenges investors too. Good ole US Treasuries appear vulnerable to rate hikes and stocks appear vulnerable to the risk of recession.

What to do?

Here’s 4 securities that work well in Stagflation

Stagflation is the conjunction between falling growth and high inflation. With Q1 GDP being negative in the US, we’re one quarter away from an official recession.

• Gold and its derivatives: Gold remains a splendid inflation hedge and safe asset overall. For those who favour stocks over commodities, look no further than GOLD:NYSE which offers an interesting entry point and will report today
• TIPS: US TIPS provide fixed income exposure with a healthy dose of inflation protection. The nice thing is that they just fell considerably to account for accelerated policy action.
• Consumer Staples stocks: staples is where inflation becomes manifest. You can look at the S&P 500 Staples index and the XLP ETF, or you can go stock by stock with the likes of WMT:NYSE

Energy and commodity stocks: this should go without saying, as the commodity squeeze continues producers and merchants of commodities post all time-high profits. From XOM:NYSE to RIO:NYSE, opportunities abound.

Conclusion

Stagflation can bring benefits to selected assets whilst depressing the market overall.

To protect capital and maintain dry powder for when the phase ends, one can create a portfolio of inflation-positive assets like Gold, TIPS, Staples and Commodities.

In addition to all of these, one could decide to go short the market. We will write more about how to do it in a separate Daily Brief!

Idea Spotlight: CVS

Technical analysis indicators for CVS Health crossed below 0 and historically, this led to a median increase in price of 6.28% over the following 1M. TOGGLE analyzed 21 similar occasions in the past to produce the median projection and this insight received 6 out of 8 stars in our quality assessment.

The company outpaced Wall Street’s expectations for first-quarter earnings and raised its guidance for the year, as it saw demand for prescriptions and more, while demand for Covid vaccines and testing declined.