The past ten days have seen lower inflation data, which is good news, but doesn’t mean we have resolved it altogether. The tariff back and forth is a major cause for concern going forward. April CPI (Consumer Price Index) rose 0.2% and sits at 2.3% year over year. This is the lowest reading since February 2021. April PPI (Producer Price Index) came in this week at 2.4% year-over-year, declining from 2.7% last month. Core PPI declined 0.4% from March and is now at 3.1% on an annual basis. Retail sales dropped significantly in April as well compared to March. Sales rose 0.1% versus 1.7% in March. The big drop was purportedly due to people buying in March before the tariffs hit and prices went up, then moving to the sidelines on fears the economy is in trouble. Of course, no one really knows what is going on as the tariff policy changes with every comment or social media post from President Trump. This causes volatility in economic data as well as stock and bond prices.
Speaking of stock prices, the S&P 500 has recovered much of the March and April selloff. It is now only 4% from the February highs. The roller coaster ride continues. The big bounce back up can be attributed to the pullback in tariffs in general and a “deal with China” that basically puts us right back where we started with them. It makes me wonder what the point in all this was. One thing is clear and that is that our policies will change with the weather and the next three years are likely to be challenging from a planning standpoint. The bond market isn’t buying the green light on lower inflation just yet. The 10-year treasury was back above 4.5% yesterday and indicates higher prices remain a possibility, if not a probability. This pressures interest rate sensitive sectors as well as real estate and autos. The relatively “good data” out this morning can maybe put a cap on rates for the time being and give bond investors and home buyers some relief. I also think that the Trump administration will do everything possible to lower rates. They have been consistent about that. Trump is at heart a real estate investor and knows that high interest rates make things difficult for a lot of people.
I have been hearing the word stagflation quite a bit from the talking heads and also from professional and family office clients. Stagflation implies slow to negative growth accompanied by sticky or rising inflation and elevated unemployment. It is a bad situation economically and tends to be difficult to get out of. The Fed can’t print money or lower rates to juice growth because that will increase inflation. The economy can’t grow its way out of it because high interest rates continually act as a drag on growth. We last saw this economic phenomenon in the 1970’s. That was caused by an energy crisis and the United States abandoning the gold standard, which cause a selloff of the dollar. The causes today may be different, but the effects are pretty similar. Tariffs like the energy crisis cause prices to rise. Instability and loss of confidence in the U.S. causes the dollar to drop. This is what people are talking about when they warn of stagflation. So, what does best during stagflation? Gold, real estate, basic materials, energy and agriculture tend to outperform. In other words, hard assets. Sectors of the stock market that tend to do best include dividend payers, utilities, staples and healthcare. We aren’t in stagflation yet, but it is worth keeping an eye on. If we proceed with the tariff blitz (even if it is just a game of chicken) stagflation may again become a household word.
At Cabana, we have reallocated our Target Drawdown and Leading Sector Portfolios in response to the improving technical conditions seen over the past few weeks. We are prepared to do so again should the rally in stocks hold. We are in our Transitional Scene moving from Bearish conditions to a resumption of the bull market.
