In an interview with MarketWatch this week, Keith McCullough emphasizes the need for investors to be agnostic and open-minded in their search for profitable opportunities. Hedgeye's CEO warns against being overly committed to U.S. stocks or trendy market sectors, suggesting this could lead to disappointment, especially given the challenging market and economic conditions he foresees.
McCullough identifies the looming challenge for U.S. stock investors as stagflation – a combination of elevated inflation and sluggish economic growth. While this isn't a favorable outlook for stocks, McCullough's investment strategy focuses on identifying opportunities wherever they may arise. He's currently allocating investments to areas like Japan, India, health care, gold, and energy stocks.
In the interview, McCullough criticizes the Federal Reserve and Chair Jerome Powell for their handling of inflation and recession threats. He anticipates Friday's meeting in Jackson Hole could reveal a more hawkish stance from Powell, possibly triggering market reactions.
McCullough advises investors to diversify their portfolios, owning assets that are less favored by the "Mother of All Bubbles" crowd. Ultimately, he believes navigating the stagflation environment requires a careful selection of assets and a readiness to adapt to changing market conditions.
Here are a few short excerpts from the MarketWatch article:
MarketWatch: When we spoke in late May, you criticized the Federal Reserve for being obtuse and myopic in its response to inflation and, later, to the threat of recession. Has the Fed done anything since to give you more confidence?
McCullough: The Fed forecast of the probability of recession should be trusted as much as their “transitory” inflation forecast or a parlor game. People should not have confidence in the Fed’s forecast. The “no-landing” or “soft-landing” thesis is looking backwards. The Fed is grossly underestimating the future, doing what they always do, in looking at the recent past.
Their policy is wed to what they say. They claim they’re not going to cut interest rates until they get to their target. But any hint of the Fed arresting the tightening gives you more inflation. So there’s this perverse relationship where the Fed is the catalyst to bring back the inflation they’ve spent so much time fighting.
SEE MORE: Transitory? LOL. 24 Cartoons Exposing Fed Bull$h*t
MarketWatch: Speaking of a Powell pivot, the Fed chair speaks at Jackson Hole this week. Last year he put markets on notice for rate hikes. What do you think he’ll say this time?
McCullough: Powell’s going to see inflation accelerating. I think Jackson Hole is going to be a hawkish meeting. That might be the trigger for the stock market.
Take the bond market’s word for it. The bond market is saying the Fed is going to remain tight and seriously consider another rate hike in September. The reasons why markets crash in October during recession is that the fourth quarter is when companies realize that there’s no soft landing and they need to guide down.
The Federal Reserve has set the table for a major event in the U.S. stock market and the credit market. We’re short high-yield and junk bonds through two ETFs: iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Bloomberg High Yield Bond (JNK). On the equity side the best thing is to short the cyclicals; I would short the Russell 2000.
MarketWatch: Clearly accelerating inflation and slowing economic growth is an unhealthy combination for both investors and consumers.
McCullough: What I’m looking for, with inflation reaccelerating, is stagflation.
Stagflation pays the rich and punishes the poor. You want to be the landlord. The prices of things people own are going to go up, and the prices of things you need to live are also going to go up. So for example, we are long energy and uranium as stagflation plays. ETFs we’re using for that include Energy Select Sector SPDR (XLE) and Global X Uranium (URA).
One positive thing that happens from stagflation is that because it’s so hard to find real consumption growth, there’s a premium on the growth you can find.
If there is something that actually accelerates, then those stocks will work, which puts a nice premium on stock picking. You can be long anything that is accelerating because so many things are decelerating. So avoid U.S. consumer, retailers, industrials and financials, which are all decelerating. Health care is our favorite sector, which we own through the ETFs Simplify Health Care (PINK) and SPDR S&P Health Care Equipment (XHE).
Click here to read McCullough's full conversation with MarketWatch. |