The word of the year is “expansion.”
The U.S. economy is past the “recovery” phase that it found itself in last year. Massive government stimulus and economic reopening sent the market into the stratosphere.
The question now is, “What’s next?”
Just this week, tech stocks have been selling off. The Nasdaq index lost over 3% yesterday alone.
Today, I’ll tell you where I think we are in the market cycle… and what the best way to play it is.
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
I’m Andrey Dashkov, and I’ve been a Casey Research analyst for over 11 years. I’ve worked under great newsletter editors… Incredible investing minds like Nick Giambruno… Louis James… Doug Casey… and Dave Forest have all helped shape my writing and thinking.
I’ve learned a lot over the years – including how to make huge gains from smart speculations…
Today, I’ll talk to you about how to make money from the “expansion” phase that we’re currently in.
Let’s Get One Thing Out of the Way
Supply constraints due to COVID were discussed as one of the main sources of inflation. Put simply, producers can’t deliver all the goods that consumers want. This leads to a lot of demand and not enough supply. As a result, prices go up.
And they have… but now the picture is changing. Supply constraints are easing up in the U.S., but the country’s inflation is one of the highest in the developed world.
In other words, there’s more going on in the U.S. than the “supply crunch.”
The red line represents the U.S. Even though it’s still running high, it went down by the end of 2021. However, inflation remains at historic highs.
In November, annual inflation was 6.8%, the largest increase since June 1982.
Inflation in the U.S. isn’t “transitory,” and neither is it caused by supply chain issues.
In 2021, the S&P 500 index appreciated by about 27%. It was one of the best results over the past decade.
But now that the economy seems to have rebounded from its pandemic lows… we have to decide whether we’ll continue seeing this kind of performance… or whether we should start being cautious.
Bullish or Bearish
As the risk of inflation looms large, investors become trigger-happy on the “sell button.”
And that’s showing up in the markets.
Bloomberg analysis shows some eye-opening facts.
Americans have saved about $2.6 trillion over the pre-pandemic level. That’s about 12% of GDP.
This pile of cash is going into the economy as consumption… It supports housing prices… and more.
During the 2021 holiday season, Americans were spending at levels not seen in about three decades…
This spending has outlived any supply chain issues that plagued markets in 2021.
And, critically, this spending continued despite rising inflation.
Therefore, it could continue well into this year and beyond…
… Which brings us to the questions of “What’s next?” and “How to play it?”
Where in the Cycle Are We?
We’re past the “recovery” phase. Right now, as I said earlier, we’re talking about an “expansion.”
That’s why the market is steering away from the tech darlings that performed so well in 2021.
It’s turning to more traditional pro-cyclical stocks which rise when the economy is growing and fall when it dips.
You can get exposure to this economic growth through “consumer discretionary” stocks and ETFs. One of them is the Consumer Discretionary Select Sector SPDR Fund (XLY). It holds companies in the retail, hotel, restaurant, leisure, and other sectors.
These should benefit from this surge of consumer spending.
The “hidden stimulus” could continue working for at least this year. There’s a lot of money in the economy, and you should take advantage of it.
Good investing,
Andrey Dashkov
Analyst, Casey Research