Short and fast, it was good while it lasted. That’s what the tombstone for the so-called “inflation trade” should read because, folks, it is dead. Once again, it’s time to look at strong growth stocks to buy, before they ride a wave of bullish macro sentiment higher.
You heard that right. The great “value rotation” that mainstream media and even some money managers have been pumping for months now thanks to what many saw as roaring inflation, is completely and utterly dead – shot by the cold reality that today’s vigorous economic recovery will not last.
You see… everyone’s been saying that this great, big economic reopening was going to spark runaway economic growth and huge inflation, the likes of which would spark a rise in Treasury yields, a huge run-up in cyclical stocks, and a big crash in growth stocks.
That is, everyone was saying that, except for me!
I’ve been saying this whole time that this great, big economic reopening is unsustainable. I’ve said it will taper off, economic activity will slow, inflation will subside, yields will fall, cyclical stocks will crash, and growth stocks will rebound.
Guess who has been right?
Not to brag, but yes, I’ve been proven right by the numbers.
The Case for Growth Stocks
The U.S. Markit Services PMI for June came in yesterday, and it was not great. The reading came in at 64.6, below expectations for a 65.2 reading and lower than last month’s 64.8 reading.
Also yesterday, the U.S. ISM Services Index for June clocked in at 60.1, below expectations for a 63.3 reading and sharply lower than the May reading of 64.0.
This data is not isolated – it follows a multi-month trend of consecutive economic data misses and slowing economic activity.
The Citigroup Economic Surprise Index – a measure of how well economic data is coming in relative to expectations – has collapsed over the past few months, while the New York Fed’s Weekly Economic Index – a high-frequency indicator of economic activity – peaked in late April at 12.01%, and has since retreated basically every week since then. That’s basically nine consecutive weeks of economic activity compression.
All the while, the 10-year Treasury yield has collapsed. That yield was testing 1.8% not too long ago. Lots of folks were saying it was going to make a run toward 2%. Now, it’s languishing around 1.35%.
And, amid this slowdown in economic activity and crash in yields, growth stocks have surged higher. Since mid-May, the Vanguard Growth ETF (NYSEARCA:VUG) is up more than 13%, versus a mere 0.5% gain for the Vanguard Value ETF (NYSEARCA:VTV).
The verdict is in, folks. The stock market has spoken. The bond market has spoken. The economic data has spoken. And they’re all saying the same thing: The U.S. economic recovery is quickly losing steam, inflation is subsiding, and growth stocks are ready to roar.
This trend is here to stay.
That is, over the next 6 months, the U.S. economy is going to keep slowing, yields are going to keep falling, and growth stocks are going to keep rallying.
How China Is Leading the Market
What makes me say that?
One word: China.
China was the first country to lock down because of the Covid-19 pandemic. It was also the first country to fully reopen. To that extent, it can be seen as somewhat of a “leading indicator” for how this unusual global economic reopening will play out in other countries.
Well, over in China, things are slowing quite dramatically. The Caixin China General Services Business Activity Index fell to 50.3 in June, from 55.1 the previous month and the lowest reading in 14 months. Of note: A number above 50 indicates economic expansion, so China’s services sector barely grew in June.
If we take China as a leading indicator for how the rest of the global economic reopening will play out – which, so far, it’s been a good leading indicator – then we can conclude that, indeed, economic activity throughout the world will continue to slow in the coming months. That will lead to a continued downtrend in bond yields, and a continued uptrend in growth stocks.
Folks… I cannot emphasize this enough… the growth stock breakout has arrived.
We had this weird bump in the road in early 2021 amid a once-in-a-lifetime, never-going-to-happen-again economic reopening that caused a multi-decade trend of growth stocks crushing the market to reverse course – and now, that unusual period is over. The reopening has come and gone. Things are getting back to normal on Main Street. And they’re getting back to normal on Wall Street, too, which means growth stocks crushing all other stocks.
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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.