Latest CapitalistHQ.com Weekly Market Report covers “Reflation or Stagnation,” and S&P 500. That’s been the key question for this market since early June, and unfortunately the soft inflation and economic data from last week left the question largely unanswered. It’s a pretty important question, because it will have significant implications on sector performance, as investors have already seen in 2017.
Stagnation, which is lower Treasury yields, slow growth, declining inflation and super-cap tech and defensive sector outperformance; dominated the markets up to June. Since June, however, “reflation,” which is characterized by better growth, higher yields, higher inflation and cyclical sector outperformance, has led.
More specifically, this reflation vs. stagnation battle can be boiled down to tech vs. banks. Up to June, tech handily outperformed as economic stagnation was evident. In June, banks outperformed as hints of reflation emerged.
Which sector “wins” is important in the short and long term. In the short term, getting the tech vs. banks allocation right will have a huge influence on near-term performance, as the performance gap between those two sectors is significant in 2017.
Longer term, though, investor should all be rooting for banks, as that signals an economic reflation, higher rates, higher inflation and a growing and healthy economy.
Last week’s events, (Yellen testimony, the soft CPI and Retail Sales) didn’t kill the reflation trade (bond yields help up relatively well), but it did injure it.
Still, CapitalistHQ is going to hold the small allocations I made to our reflation basket (KRE/KBE/XLI/IWM/TBT/TBF) through this weakness, and resist the urge to chase super-cap tech (FDN) here.
Beyond banks and tech, the outlook for healthcare (XLV, IHF, IBB), Europe (HEDJ, EZU) and emerging markets (IEMG) remains positive, and they are offering sector-specific positives that help insulate them from the reflation vs. stagnation debate. I remain positive on all those sectors.
From a macro-risk standpoint, slower economic growth, if it continues, is a problem. That’s because the world’s central banks are becoming less dovish (see Bank of Canada last week). Beyond the near term, this trend of middling data is long-term concerning, although it’ll take a bigger drop in economic activity or a bad earnings season for investors to notice. Longer term, if data doesn’t get better, the outlook will start to darken. For now, the trend in stocks remains higher, and the focus is on outperforming and allocating to the “right” sectors… and that’s where our focus remains.
Read the complete report at CapitalistHQ.com
Release ID: 218151