Stagflation could still happen in the US. Here where to invest now

14 June 2024 - 17:00

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As far as stocks are concerned, the preference is for Value over Growth with anti-cyclical sectors that can offer upside ideas.

Stagflation could still happen in the US. Here where to invest now

From what has been seen previously, it can be stated that the current American economic cycle is slowing down with nominal wage growth of around 5% as well as consumer spending. The labor market is in the process of normalizing, moving away from the intense post-pandemic period but still remaining "tight". From the latest employment report released by the American authorities, few layoffs emerged and at the same time a slowdown in new hiring this does not mean that there are any immediate critical issues but that, on the contrary, it could take another 2 years to return to average levels (from 1994).

The main danger of the American economic cycle is that the slowdown in wage and job growth with a savings rate already at the lowest levels may result in a weakening of demand enough to disappoint expectations for American GDP growth for the remainder of 2024. which today are quite high.

A similar discussion concerns the growth in profits of American companies whose outlook is perhaps too optimistic despite the good performance of the first quarter (bottom-up EPS estimates are for +17% y/y by the end of the quarter). The Fed will have a difficult task to reduce inflationary pressures that persist as wage growth and private spending growth may not be weak enough to reduce them. The main danger therefore remains the fall into stagflation for the US economy given that the negative surprises in the economy and inflation seem to indicate this possibility.

More generally, the issue of inflation continues to be a concern due to excess fiscal spending which appears to be too stimulating for global economies.
The addition of President Biden’s duties on China is also a source of pressure on consumer prices as is the rise in raw material prices, which have returned to 1-year highs.
And despite this rise compared to the S&P500, Commodities remain close to the price minimums relative to the American index.

At present it can be said that many of the Western economies have returned to a sort of Goldilocks economy because economic growth is moderate and inflation remains at tolerable levels for the moment, the combination of which does not allow long-term yields to rise further (nor to go down) and on the other hand to the stock market not to see expectations disappointed (as long as they are not too excessive).

The determining factor remains the Federal Reserve whose role has been significantly more active in supporting the financial markets, the "Buy the Dip" trend has strengthened in the last 2 decades thanks to the support of central banks (the Fed in particular) in maintaining the necessary liquidity on the markets.

Therefore, as long as central institutions remain supportive of the financial markets, it is unlikely that there will be a sharp drop in prices on the horizon. However, a general increase in security prices in a context like the current one is unlikely to happen, investors are tending to skim opportunities differently than in recent years.

Given the context, as far as equities are concerned the preference is for Value over Growth with anti-cyclical sectors that can offer upside ideas. On bonds, however, the preference always remains for short-term securities where there is a greater return without taking on Duration risks as it is still premature. Geographically, the bonds of emerging countries are attractive given the carry offered, even from an equity point of view, countries such as China or India remain in the interest spectrum while in Europe the bonds of peripheral countries should continue to outperform the Core ones ( also for political reasons). Commodities could continue to perform positively especially somewhere there is an imbalance between supply and demand (for example: Silver and Uranium) while from the point of view of strategies, directional equity themes can bring alpha to the portfolio as well as bond ones short term or flexible. Multi-asset strategies can help portfolio diversification, in a context like the current one they are useful for generating returns while maintaining a risk profile that is not too high.

Original article published on Italy 2024-06-13 06:00:00. Original title: Per gli USA resta vivo rischio stagflazione. Ecco le asset class su cui investire ora

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