Stagflation vs. Reflation in 2017

Good afternoon,

I have been getting a lot of questions about the markets for 2017.Despite our 24/7 news cycle, I have yet to see anyone ask the big question, “Are we going to see reflation or stagflation?”

My job is to tell you, before everyone else, whether we’re going to see reflation or stagflation… and to make sure you know how to position your money and/or your clients, accordingly.

I will continue to watch: 1) Key economic numbers, 2) Key Inflation numbers and 3) Politics, because this will likely be decided in Q1 2017, and getting it “right” early will make a big difference in starting the year right.
 
I believe this market is headed towards a significant fork in the road, and knowing which turn the markets and the economy take will be critically important for advisors and investors.

Throughout the fourth quarter, the level of peripheral “noise” in the markets has been steadily increasing. But last week was especially “noisy,” with US politics, economic data, European politics and OPEC all producing headlines.

But as we mentioned in this week’s “Bottom Line” (contained in the subscriber only edition of Advisor Cheat Sheet) when you cut through all the noise, the major question facing investors is relatively clear…

Do you expected “Reflation,” or do you expect “Stagflation?”

One of those outcomes will decide where stocks go in the early part of 2017, and that opinion needs to dictate how you are positioned.

Since Election Day, clearly the money has been flowing to reflation, but despite growing optimism, that’s not a foregone conclusion.

Today, I want to review the assumptions for reflation and stagflation, along with the appropriate tactical allocations depending on which outcome you think is most likely.

Reflation: Higher Growth, Higher Earnings, Higher Inflation, Higher Stock Prices

The script for reflation powering stocks higher in the first half of 2017 is as follows:

1. Trump and Ryan cut personal and business taxes

2. And repatriate trillions in offshore cash (due in large part to reduced business taxes)

3. The administration eliminates over-regulation, starting with Obamacare and then Dodd-Frank

4. There’s increased infrastructure spending that provides fiscal stimulus to the economy, and

5. The global macro environment stays broadly calm and unchanged from present day, with no Brexit fallout in March, no “Ita-leave,” no Marie Le Pen victory in France, and no trade conflicts with China.

Under that scenario, growth is ignited, and that acceleration in growth overpowers the headwinds of higher interest rates and a stronger dollar, along with rising inflation. 

And, that surging growth combined with reduced taxes helps increase corporate earnings and keeps the market at a justifiable multiple.

Under this scenario, stocks can trade higher from current levels, and materially break through resistance at 2200 in the S&P 500.

Stagflation: Flat growth, Flat earnings, Rising Inflation, Lower Stock Prices

The script for stagflation halting this recent rally in the first half of 2017 is as follows:

1. Implementation of the Trump/Ryan agenda hits multiple speedbumps in Washington and the actual implementation of the agenda is a much more watered down (and/or delayed) version of what’s expected.

2. Growth remains “ok,” but doesn’t experience the intense acceleration that was expected. The mild uptick in growth is not enough to offset higher interest rates, the stronger dollar and inflation, and earnings don’t increase and stocks remain expensive.

3. Geopolitically, Trump’s off-the-cuff tweeting and policy communications unnerves investors and undermines domestic policy actions, creating an unknown that acts as a global macro headwind.

4. Meanwhile, inflation continues to slowly build momentum, forcing global central banks (especially the Fed) to turn incrementally more hawkish.

5. This scenario doesn’t even include a negative macro surprise like “Hard Brexit,” “Ita-leave” or China trade disputes.

Tactical Investment Takeaways

Sector Winners and Losers Regardless of the Scenario: In either case, I think it’s reasonable to expect: 1) Higher rates, 2) Higher inflation and 3) A stronger US dollar.

Expected Tactical Sector Winners: 1. Inflation-linked ETFs (3 ETFs Restricted for Subscribers). 2. Higher interest rate linked plays (2 ETFs Restricted for Subscribers). 3. Inverse bond funds (4 ETFs Restricted for Subscribers).

Expected Tactical Sector Losers: Restricted for subscribers

Reflation Portfolio: 4 Specific ETFs to Overweight and 4 specific ETFs to Underweight (Specific ETFs Restricted for Subscribers). 

Stagflation Portfolio: 4 Specific ETFs to Overweight and 4 specific ETFs to Underweight (Specific ETFs Restricted for Subscribers)

Advisor Cheat Sheet provides more than basic market analysis and commentary.

We make our analysis actionable for subscribers by consistently providing ETFs that we believe can benefit from changes to the macro-economic set up.

That is why we provided our paid-subscribers with a list of sector winners and losers for a Trump victory back on September 28th (we also provided a list of Clinton winners and losers as well), so that our subscribers would be prepared for any election outcome and ready to position accordingly on Wednesday, November 9th.

Since the election:

  • The three infrastructure stocks we provided for subscribers have risen an average of 10.07%
  • Our preferred Defense ETF has risen 10.85%.
  • Our preferred Biotech ETF has risen 3.94%.
  • Our preferred Energy ETF has risen 8.90% and
  • Our preferred Bank ETF has risen 22.08% and hit a new 52-week high!

Meanwhile, the S&P 500 is up just 3.05% over the same time frame. So clearly, our sector allocations are not only working, they are massively outperforming in the wake of the election. 

That is the kind of analysis that Financial Advisors can use to show their clients they are on top of the markets and always ready to react even to unlikely market surprises such as Brexit or the surprise Trump election victory. That is just one of the ways our subscribers build stronger client relationships. 

Click here to subscribe today, and learn the ETFs and strategies we believe will outperform in early 2017.

So why not let us help you achieve the same results?

It has been a whirlwind in the financial markets this year, and while many see volatility as a disadvantage for those in the wealth management and advisory business, we see it as an opportunity to get more clients.  

We have had a lot of positive feedback so far this year as we continue to help our subscribers navigate these volatile markets and as a result, find and retain more clients. And we are extremely confident that we can do the same for you in 2017!

Advisor Cheat Sheet isn’t just another research tip sheet that’s designed to tell you whether stocks are going to go up or down. Rather, it’s a tool we have created for the purpose of helping advisors:

  1.  Attract more clients
  2.  Increase assets under management
  3.  Improve retention

Our job for our paid subscribers (wire house advisors, RIAs, Portfolio Managers) is to look past the volatile bullish or bearish headlines, and every week give an independent, fundamental and technical outlook on the markets over the short, medium and longer term that can help advisors and investors:

1) Increase market knowledge while saving time (current subscribers say our report saves them hours of research time per week).

2) Outperform major benchmarks (at the end of the day, this is a results business)

3) Always have market-related talking points ready to impress clients and prospects so you can strengthen relationships and increase AUM.

We do the research every single day that helps us identify the key leading indicators in this market right now, because the type of cross asset research we provide every day to clients is needed for this macro environment.

Because of the great response we have seen, we are continuing to extend a special offer to new subscribers of our full, weekly report that we call our “2-week grace period.”

If you subscribe to Advisor Cheat Sheet today, and after the first two weeks you are not completely satisfied, we will refund your first payment, in full, no questions asked.

To start your subscription, and see for yourself how Advisor Cheat Sheet can help you grow your business, click here.

Leave a Reply