MarketGauge’s Forecast: Profitable Investments During Stagflation

At MarketGauge, we believe we are in a stagflation period that could last six months to three years. Nevertheless, we continue to find profitable investments in this new regime.

Some of our forecasting can be traced directly to the war in Ukraine, so if the war ends tomorrow, our forecasts will also change.

The war has severely constricted the world’s supplies of oil, wheat, fertilizer, and other products. The economic and human cost of the Ukraine invasion will ultimately be profound.

The Federal Reserve is in the initial stages of tightening monetary policy to fight inflation. Most Fed watchers expect 50-75 basis-point interest rate hikes in June and July and more after that. The Fed has not begun quantitative tightening to shrink the balance sheet. Furthermore, a strong labor market proves wage inflation, and the war in Ukraine means food and energy shortages will persist. 

With inflation still high on consumers’ minds, bond yields rising, and interest rates heading up, these factors, combined with economic turmoil abroad caused by war, are causing dislocations.

Where is the best place to park your money now?

With the S&P 500 still at average levels and PE multiples staying there, for now, we expect more downside in the future.

We are also early days into this bear market, so I don’t think it’s too late yet to get on board with us.

My daily blog has profitable ideas every week.

This week our focus was on natural gas, sugar, copper, and ARKK. We have advised our clients and are now watching to see if our positions hold or if we will exit with our disciplined risk management approach.

Our quant models are in solar, biotech, China, and a few other select sectors yielding returns. We are light overall regarding holdings, ready to deploy cash, and in the black for most of our portfolio strategies. We have been long China for months and actively manage our positions.

On Wednesday, we bought the Copper miners and made more than a few shiny pennies on the trade. We are bullish on copper long-term as we understand that the world is electrifying, and the market fundamentals support much higher copper prices. Please sign up for my daily blog below to view more ideas like this.

To comment on today’s job report, I got asked on media if I thought that recession is staved for now, was I surprised?

My answer is, not at all. In fact, we find it affirming that the economy is just stagnating as that is exactly what we have predicted and positioned for. 

Plus, regardless of where the Fed goes from here, we still very much believe that the combination of labor issues, supply chain problems, the weather patterns and geopolitics, investors should not take their eyes off commodities for investment purposes.

We believe that inflation in the essentials has not abated-that the recent dislocation of prices in food and energy versus the fundamentals only showed how volatile commodities are by nature.

In the 1970s-commodities ran up in 1973, fell hard in 1976, and then by 1979, we got the explosion of hyperinflation-we particularly like to track sugar as a lead indicator even more than gold. 

The second-quarter earnings seasons start late next week, which coincides with the tradable range reset we follow at MarketGauge. We will be watching second-quarter earnings and expect margin compression and around 5% earnings growth which is the consensus. 

Typical stagflation is a rangebound market-mean reversion style trading, where extreme rallies get sold and drastic drops get bought.

The equities market is mainly rangebound at the moment. We view SPX 3600-4000 as the tradeable area and is the range to watch to break one way or another.

July resets the calendar range for H2. After that, we will have a better idea of where to put cash to work-long or short. A lot will depend on what breaks up or down as we drift into and set the new calendar range.

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Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

See Mish as she joins MarketGauge’s Keith Schneider, DecisionPoint’s Erin Swenlin and StockCharts’ David Keller to discuss how they coped with past prolonged bearish periods in the new StockCharts TV special presentation “Survival of the Fittest: A Brief History of Bear Markets”.

See Mish explain how buyers’ remorse and hope are driving Musk’s negotiations with Twitter in this Fox Business appearance.

Mish walks thru some of the caveats of the jobs report and why stagflation is still a thing with Neil Cavuto on Fox Business.

Mish talks about China, ARKK, Staples and Commodities – regardless where the economy goes – in this appearance on Fox Business’s Making Money with Charles Payne.

Read Mish’s latest article for CMC Markets, “When Dr. Copper Speaks, We Listen“.

With newer fears of recession, Mish takes a walk back to the 1970s, when dislocation wreaked havoc by the end of the decade, in this video from Bloomberg TV.

ETF Summary

S&P 500 (SPY): 383 now support, with 397 best overhead resistance.Russell 2000 (IWM): 174 now support, but could not get a weekly close over 176.50.Dow (DIA): 307 support and needs to clear 315.Nasdaq (QQQ): 290 now support, with 297.00 the overhead 50-DMA.KRE (Regional Banks): 56 the 200-WMA; 60 resistance.SMH (Semiconductors): 200 now interim support; 210 resistance.IYT (Transportation): 211.90 support, with resistance at 220.IBB (Biotechnology): 129.50 big resistance.XRT (Retail): Closed over 60.75 the 200-WMA, needs to stick.

Mish Schneider

Director of Trading Research and Education