This week, we looked at the likelihood of a recession.
But in the process, we uncovered an even larger threat looming on the horizon…
Stagflation hasn’t happened since the 1970s. During that time, inflation soared over 13% while unemployment reached almost 11%.
This combination of high inflation and slow economic growth was devastating for the stock market. The S&P 500 gained only about 0.8% per year on average from 1973 to 1982.
And those small gains came with large volatility. Long-term investors would’ve had to white-knuckle through four 20% crashes, and 16 corrections of at least 10%:
It was a terrible time to buy and hold. But while most of the market was collapsing, a few sectors were thriving — and handing traders ample opportunity to profit.
If you know where to look, this time will be no different.
Stop Clinging to Yesterday’s Top Stocks
Stagflation is a broad description of the economy. It doesn’t mean every company was stagnant.
There were plenty of losers in the 1970s, but there were plenty of winners as well.
The decade saw a lot of innovation, especially in retail. AutoZone, Home Depot, and Whole Foods were all founded in that time. A few tech companies got their start as well, including industry giants Apple and Microsoft.
At the same time, Chrysler flirted with bankruptcy. Franklin Nation, the 20th largest bank at the time, failed in 1974. The Hunt brothers tried to corner the silver market and ended up crashing that bubble. In fact, the entire commodity sector went boom and bust as stagflation roared.
This time will be no different. There will be winners and losers over the next few years.
The problem is, many investors want to believe that winners always win. They hang on to winners of the last cycle, even when they should sell.
Netflix is a great example. The company changed television. It had a great run and then it crashed. It’s down 62% in 2022.
Peloton was also an “industry disruptor” for adding Wi-Fi to stationary bikes… But today, it’s down 91% from its highs.
Tech stocks like these were the darlings of the market over the last few years.
But now, the Nasdaq 100 is the market’s weakest link. Unlike the S&P 500 and small caps, tech stocks remain far below their 200-day moving average.
Tech is just not hanging in there. And if it can’t handle the bear market we’ve seen so far, it’s certainly not equipped to lead the market once stagflation hits the U.S. economy.
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Stop clinging to yesterday’s winners. For just $4 a month, you can join Market Leaders — and hundreds of other investors who are ready to embrace the new.
Regards,Michael Carr, CMT, CFTeEditor, True Options Masters