It isn’t just Wall Street that is concerned about stagflation, the dreaded combination of sharply rising prices alongside a slowing economy.
The chart below shows worldwide searches on Google for “inflation” (the line in blue) and “recession” (red). Given that worries about both inflation and economic contraction can become self-fulfilling, the surge in interest over recent months is concerning.
For Jay Kaeppel, senior research analyst at SentimenTrader, the inflationary environment in particular is making life very tough for investors.
“It seems like there’s nowhere to hide. Cash is losing ground in real terms, stocks (and bonds) have been tanking, and even gold isn’t doing what we were told it’s supposed to do,” he says.
But he has discovered what he describes as a simple strategy — switching between consumer staple and discretionary spending exchange-traded funds — that has helped investors outperform during a period of extreme price increases.
“For our purposes, extreme inflation occurs when the consumer price index rises more than 3% from its level a year ago. Extreme deflation occurs when it drops 3% or more (it’s been decades since we’ve seen that),” says Kaeppel.
His chosen vehicles for this trade are the Consumer Staples Select Sector SPDR Fund XLP and the Consumer Discretionary Select Sector SPDR Fund XLY.
The execution is as follows. If the latest CPI inflation reading (taken at the end of the month) is greater than 3% or lower than minus 3%, then the XLP is held during the following month.
But if the latest CPI is moderate, within the plus/minus 3% range, then the XLY is held for the following month.
For a baseline, the switching strategy was compared with a 50/50 split between the two funds, rebalanced at the end of each year. In essence the strategy is exploiting a tendency for consumers to spend relatively more on staples during periods of high inflation.
And the outcome? According to Kaeppel: “Since the first full year after these funds’ inception in 1998, the switching strategy returned +1,397%, nearly triple the rebalancing strategy. And it did so while suffering a smaller maximum loss and fewer down years.
“There aren’t many ways to protect against inflation, but switching between these two funds has been one effective way,” he concludes.
Markets
S&P 500 futures ES00 fell 15 points, or 0.4 percent to 3955 as the market absorbed a flurry of earnings. The dollar index DXY added 0.5 percent to 107.04 and gold GC00 fell 0.2% to $1,716 an ounce. Bitcoin BTCUSD slumped 4.7% to $21,122. Crude oil futures CL climbed 1.7% to $98.25 a barrel.
The buzz
Walmart WMT stock sinks after profit warning citing impact of inflation, hitting other retailers such as Amazon AMZN and Target TGT.
European gas prices jumped again, with the ICE Dutch TTF gas futures contract rising 9.6% to 193.6 euros per megawatt-hour, after Russia cut supplies further.
The U.S. second-quarter earnings season continues, and so far on Tuesday it’s a mixed bag. Results from 3M MMM and General Electric GE were welcomed and shares moved up in pre-market trade. But General Motors GM disappointed.
Alphabet GOOG and Microsoft MSFT come after the closing bell.
U.S. economic data on the slate include the May S&P Case-Shiller national home price index, due at 9 a.m., the July consumer confidence index and new home sales for June, both due at 10 a.m., all Eastern.
Best of the web
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The chart
Much was made last week of a Bank of America survey that showed fund managers are spectacularly miserable. So downbeat, in fact, that many argued things can only get more bullish. Here’s another example of extreme caution. The chart from a JPMorgan note shows open interest on CBOE VIX calls at a strike price at or above 40 have recently hit a record high. A VIX spike above 40 tends to only happen when the market dives. A lot of people have been betting/hedging for that.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
| Ticker | Security name |
| GME | GameStop |
| TSLA | Tesla |
| XELA | Exela Technologies |
| AMC | AMC Entertainment |
| AMZN | Amazon |
| NIO | NIO |
| AAPL | Apple |
| RDBX | Redbox Entertainment |
| WMT | Walmart |
| SNDL | Sundial Growers |
Random reads
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Tree-huggers of the world unite.
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