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Key Points

  • Growth Over Value Points to Continued Slowing Economic Growth
  • Fiscal & Monetary Stimulus Leading to Rising Commodity Prices
  • No Growth + Inflation = Stagflation
  • Dollar is Key Indicator to Watch
  • Gold and Treasuries Remain Important Portfolio Diversifiers

Action Plan

The unprecedented amount of fiscal and monetary stimulus that has been showered on the US and global economies has the potential to lead to inflation...an environment of generally rising prices. Unfortunately, this could be playing out in an environment of little to no economic growth. Chairman Powell has told us that rates will remain near zero through 2022. It is hard to imagine that he sees much in the way of growth if he is willing to make this call in June of 2020.

According to Investopedia, stagflation is a seemingly contradictory condition described by slow economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a period of inflation combined with a decline in gross domestic product (GDP). The odds that stagflation becomes a reality here in the US are rising in my view. That will have implications for portfolios and relative relationships going forward.

Thankfully, markets are discounting mechanisms and trends begin to develop ahead of the fundamental data points that investors will LATER use to justify those trends. As such, in a stagflation environnement, many of the key themes on which we have remained bullish are likely to continue to outperform.

In particular, favoring growth in a no-growth world; diversifying with treasures which have a tendency to zig when the equity market zags and having an allocation to gold (which should serve to protect purchasing power as Central Banks around the globe do all that they can to erode the purchasing power of the fiat currencies over which they have control) are themes that we continue to highlight.


The SPDR S&P 500 ETF has a Bullish Chaikin Power Gauge ETF Rating and is above the rising long-term trend line which is near the lower end of the support zone that we have been highlighting in the $300 to $310 range. Near-term resistance is in the area of the island reversal that was left in place following the gap lower on June 11th, near the $320 level.

Using the near-term support and resistance levels above, we can see that the risk (~ 8 points of downside) vs the reward (~12 points of upside) is not all that compelling given the current price. At best we can say that the SPY is consolidating in the context of an uptrend from the March 23rd lows. If this is the case, a break of $320 would open the door to a run to the February highs and would be a much more compelling level to becoming aggressive on the long side of the portfolio. However, if the market is stalling here, a break of $300 sets the stage for $285. Below $285, the playbook must shift to a defensive / bearish regime.

Growth continues to be our favored exposure in the growth vs value debate as we remain of the view that in a slowing growth world, investors should own what is actually growing. This view is largely born out in the trends in the market as we can see in the ratio chart of Russell 3000 Growth vs Russell 3000 Value.

The chart is fairly straightforward but just to reiterate, that is a new relative high for growth over value. Interestingly, across market caps (small, mid and large), the Chaikin Power Gauge ETF Rating favors growth as those funds carry bullish ratings while the value funds have neutral ratings.

Our working assumption is that growth leads value in a slow to no growth world and that is largely playing out as it has for the better part of the past two years. The case can be made that growth is expected to be anemic at best. However, there is something new that could be a concern for investors for the first time in over a decade...Inflation. The stimulus response to COVID-19 has been more than at the monetary level, there has also been a substantial amount of fiscal stimulus added to the system. According to the IMF the amount of fiscal stimulus that the US has provided to citizens is well over $2.5 trillion. Suffice to say, that a lot of this money is being put to use in the economy. This can best be seen in the recent strength of commodities. An asset class for which I can’t remember the last time that I had anything good to write.

The Invesco DB Commodity Index Tracking Fund (DBC) is not rated. The fund has been lagging the SPY for more than a year as fears of a global growth slowdown have been a persistent theme since before COVID-19. Support is near $11.50 while resistance is just overhead at $12.50. The fund is moving higher from the March lows and a break of the $12.50 level would be a key sign that the downtrend is reversing course.

No Growth + Inflation = Stagflation. That is not a great scenario for investing but unfortunately we do not get to choose our environment, only how we react to it.

At the equity level, our favorite theme (growth) should continue to be leadership. However, it will be important to have a layer of protection and diversification. This would come in two forms in my opinion. First, investors will want to hold assets that are uncorrelated or inversely correlated with equities. A quick look at the matrix below will show us the one year correlations of different ETFs that represent key asset classes. Looking down the first column, we can see that red boxes are assets that are inversely correlated to equities...you guessed it, treasuries. All else being equal, if equities fall, treasuries should rise in price. Given the fact that this would be playing out within the context of rising prices, the preference should be toward shorter duration (recall that we started making that case a few weeks ago in these pages).

The white boxes represent the groups that have little correlation to equities. Gold and gold miners fit the bill there. We have been bullish on this theme for more than a year.

The trigger to the onset of stagflation in my view would be a collapse of the dollar through key support near $26. The Fed is printing dollars to keep liquidity in the system. In theory, a good that can be so easily created is not worth all that much. But why hasn’t the dollar collapsed as the Fed has been printing for over a decade. The short answer is because everything is relative and the rest of the world has been printing as well. There has literally been a global race, it seems, to see who can devalue their currency the fastest. So far, in relative terms, it has not been the US who is winning that race. However, if the dollar cracks, it is likely to lead to a strong move higher in commodity prices (remember, commodities are priced in newly devalued dollars).

I would also note that in the environment highlighted in this week’s note, there are other assets that could also serve as a store of value. We have been and remain bullish on companies that are building and investing in and on the blockchain. At the same time, I have become increasingly bullish on Bitcoin and other digital currencies in which I am making personal investments. The Grayscale Bitcoin Trust (GBTC) is not rated but has been leading the SPY since May.

Dan Russo, CMT
Chief Market Strategist


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