No one dared to speak about the potential for stagflation, the dreaded word representing portmanteau of stagnation and inflation, at the World Economic Forum in Davos early this year despite the looming Trump tariff and trade war.
However, investors have acknowledged the s-word risk, leading to the outperformance of stagflation-linked strategies relative to the buy-and-hold bitcoin and the S&P 500.
As of last week, Goldman Sachs’ “stagflation basket,” which bets on strength in commodities and defensive plays like health care and shorts on the consumer discretionary, semiconductors and unprofitable tech stocks, was up nearly 20% for the year..
The S&P 500, Wall Street’s benchmark equity index, has dropped 4% this year, with bitcoin, the leading cryptocurrency by market value, down 10%, per data source TradingView and CoinDesk.
The International Monetary Fund defines stagflation as a situation where high inflation coincides with economic stagnation, high unemployment and a general decline in economic activity.
“It does seem like stock and bond prices are adjusting for lower growth and higher inflation [stagflation] – although, there are other factors at work here – healthcare, for instance, is most likely benefitting from the promise of deregulation offsetting direct funding cuts,” Noelle Acheson, author of the Crypto Is Macro Now newsletter, told CoinDesk.
Stagflation murmurs have been heard since early 2022, but markets have begun pricing the same this year, mainly due to Trump’s tariffs and the escalating trade tensions.
Forward-looking inflation metrics like two-year and five-year swaps rose to multi-year highs, a sign of fears of a trade war making consumption pricier. Meanwhile, a key section of the Treasury market yield curve recently flipped into inversion, signaling a recession ahead. Several real-time GDP trackers, like the Atlanta Fed’s GDP, have signaled a sharp contraction in economic activity.
A potential stagflation is perfect situation for assets with perceived store of value appeals such as bitcoin to shine. Note that gold has gained 13% this year.
However, the bull case in the cryptocurrency propounded by its holders for years hasn’t materialized. In fact, BTC’s correlation with U.S. stocks has strengthened over the past few weeks.
That does not necessarily mean BTC is no longer a safe haven, according to Noelle Acheson, author of the popular Crypto Is Macro Now newsletter.
“BTC is short-term a risk asset with prices set by the last short-term trade – long-term, it’s a safe haven given its verifiable hard cap and global utility – these days, the market is in a risk-off mood, so macro portfolios are lightening positions, and we have yet to see the new inflows necessary to get the next leg of its run going – this could take some time, as uncertainty is high for both professional investors and retail,” Acheson noted.