No one dared to speak about the potential for stagflation, the dreaded word representing portmanteau of stagnation and inflation, at the World Economic Forum in Davos early this year despite the looming Trump tariff and trade war.
However, investors have acknowledged the s-word risk, leading to the outperformance of stagflation-linked strategies relative to the buy-and-hold bitcoin and the S&P 500.
As of last week, Goldman Sachs’ “stagflation basket,” which bets on strength in commodities and defensive plays like health care and shorts on the consumer discretionary, semiconductors and unprofitable tech stocks, was up nearly 20% for the year..
The S&P 500, Wall Street’s benchmark equity index, has dropped 4% this year, with bitcoin, the leading cryptocurrency by market value, down 10%, per data source TradingView and CoinDesk.
The International Monetary Fund defines stagflation as a situation where high inflation coincides with economic stagnation, high unemployment and a general decline in economic activity.
“It does seem like stock and bond prices are adjusting for lower growth and higher inflation [stagflation] – although, there are other factors at work here – healthcare, for instance, is most likely benefitting from the promise of deregulation offsetting direct funding cuts,” Noelle Acheson, author of the Crypto Is Macro Now newsletter, told CoinDesk.
Stagflation murmurs have been heard since early 2022, but markets have begun pricing the same this year, mainly due to Trump’s tariffs and the escalating trade tensions.
Forward-looking inflation metrics like two-year and five-year swaps rose to multi-year highs, a sign of fears of a trade war making consumption pricier. Meanwhile, a key section of the Treasury market yield curve recently flipped into inversion, signaling a recession ahead. Several real-time GDP trackers, like the Atlanta Fed’s GDP, have signaled a sharp contraction in economic activity.
BTC failed as digital gold?
A potential stagflation is perfect situation for assets with perceived store of value appeals such as bitcoin to shine. Note that gold has gained 13% this year.
However, the bull case in the cryptocurrency propounded by its holders for years hasn’t materialized. In fact, BTC’s correlation with U.S. stocks has strengthened over the past few weeks.
That does not necessarily mean BTC is no longer a safe haven, according to Noelle Acheson, author of the popular Crypto Is Macro Now newsletter.
“BTC is short-term a risk asset with prices set by the last short-term trade – long-term, it’s a safe haven given its verifiable hard cap and global utility – these days, the market is in a risk-off mood, so macro portfolios are lightening positions, and we have yet to see the new inflows necessary to get the next leg of its run going – this could take some time, as uncertainty is high for both professional investors and retail,” Acheson noted.
She explained that tailwinds remain intact and once the market adjusts to the new economic landscape, inflows into the crypto market will likely resume.
“The tailwinds remain intact, with education spreading, new institutional services coming online and jurisdictions around the world drawing up regulatory frameworks that institutions will be comfortable with (and through them, mainstream retail),” Acheson said.
Stagflation mispricing
Markus Thielen, founder of 10x Research, offered a slightly different take, saying the market is wrong in reading the situation as stagflation.
“What we’re likely seeing is a front-loading of tariff impacts, driving a temporary spike in commodity demand that should fade in the coming months. Additionally, uncertainty surrounding DOGE is weighing on growth expectations,” Thielen told CoinDesk.
He added that a potential dovish tone from the Fed later this week could revive a bullish mood in risk assets, including BTC. Last week, Trump halted a plan to double U.S. tariffs on Canadian steel and metal imports to 50%. The Fed is set to announce its rate review on Wednesday.
“Recent comments from Trump suggesting a potential softening of aggressive trade policies combined with a possible mildly dovish tone from the Fed this week could set the stage for a rebound in growth-oriented assets. Historically, betting on prolonged stagflation has rarely been a winning strategy over the past 40 years,” Thielen noted.
