I mentioned last week that it may be the most important week of the quarter, and it did not dissappoint. After the Fed meeting and inflation data, we now see stagflation as our baseline scenario. It went away for a while, but the word is back, and it is something we need to watch closely (see this week’s chart). GDP growth has slowed to 1.5% while GDP price index has increased to 6.3% — higher prices, lower growth — that is the definition of stagflation.
Markets whipsawed a bit last week in response to big tech names. This is not yet a panic, but investors are now punishing companies that are spend-only on AI, they want to see earnings. In that vein, we see earnings from chip-makers this week, and that will be an important data point. Namely, is the chip shortage still a thing, or is the market saturated?
All-in-all, the data from last week has increased the likelihood of downside in the coming year. Worse yet, in a stagflationary scenario, bonds and stocks tend to lose value together. We highly recommend adjusting portfolios to update this potential reality.
Chart of the Week
In this week’s chart, we see the progression of the data from “soft landing” in 2024 toward “stagflation” in the latest data. What we’d expect to see from unemployment is a slow grind higher, not a normal recessionary spike. So, that will be the data we’ll be eyeing this week.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.