The potential for stagflation—a term that blends stagnation and inflation—was largely absent from discussions at the World Economic Forum in Davos earlier this year, despite concerns about impending tariffs and trade conflicts stemming from the Trump administration.
Nonetheless, investors have started to recognize the risks associated with stagflation, which has resulted in better performance for strategies linked to this economic scenario compared to traditional buy-and-hold approaches involving bitcoin and the S&P 500.
As of last week, Goldman Sachs’ “stagflation basket,” which focuses on commodities and defensive sectors such as healthcare while shorting consumer discretionary, semiconductor, and unprofitable technology stocks, has risen nearly 20% this year.
The S&P 500, a key benchmark for equity markets, has seen a 4% decline in 2023, while bitcoin, the leading cryptocurrency by market capitalization, has dropped 10%, according to data from TradingView and CoinDesk.
The International Monetary Fund describes stagflation as a condition characterized by high inflation paired with economic stagnation, elevated unemployment, and a general downturn in economic activity.
“It appears that stock and bond markets are recalibrating for reduced growth and increased inflation [stagflation]—though other factors are also influencing this dynamic; for example, healthcare seems to be reaping benefits from anticipated deregulation counteracting direct funding cuts,” remarked Noelle Acheson, author of the Crypto Is Macro Now newsletter.
Whispers of stagflation have circulated since early 2022, but this year has seen markets beginning to price this in, largely due to the impact of Trump’s tariffs and rising trade tensions.
Forward-looking inflation indicators, like two-year and five-year swaps, have reached multi-year peaks, signaling concerns that a trade conflict could drive up consumer prices. Moreover, a crucial segment of the Treasury yield curve has recently inverted, hinting at a potential recession ahead. Various real-time GDP trackers, such as those from the Atlanta Fed, have indicated a significant contraction in economic activity.
BTC’s Struggles as Digital Gold?
In a stagflation scenario, assets perceived as stores of value—like bitcoin—should ideally outperform. Notably, gold has appreciated by 13% this year.
However, the bullish case for cryptocurrency that its advocates have maintained for years has yet to come to fruition. In fact, bitcoin’s correlation with U.S. stocks has intensified in recent weeks.
This doesn’t necessarily imply that bitcoin has lost its status as a safe haven. According to Noelle Acheson, it remains a risk asset over the short term, influenced by the latest trades, but in the long term is viewed as a safe haven due to its capped supply and global applicability. “Currently, the market exhibits a risk-off sentiment, prompting macro portfolios to reduce positions. We haven’t seen the new influxes needed to drive the next phase of its growth—this could take some time due to high levels of uncertainty among both institutional and retail investors,” Acheson pointed out.
She also expressed that underlying positive trends are still intact, and that as the market adjusts to the evolving economic landscape, the flow of investments into the crypto sector could recover.
“Positive forces are still at play, with growing educational efforts, new institutional services launching, and regulatory frameworks being established globally that will appeal to institutions—and subsequently to mainstream retail,” Acheson added.
Misjudging Stagflation
Markus Thielen, the founder of 10x Research, presented a contrasting viewpoint, arguing that the market may be misinterpreting the current situation as stagflation.
“What we might be witnessing is a preemptive reaction to tariffs, causing a temporary surge in commodity demand that is likely to taper off in the coming months. Additionally, uncertainty surrounding DOGE is likely dampening growth forecasts,” Thielen suggested.
He further mentioned that a potentially dovish tone from the Federal Reserve later this week could rejuvenate a bullish outlook for risk assets, including bitcoin. Recently, Trump paused a plan to double U.S. tariffs on Canadian steel and metal imports to 50%. The Fed is scheduled to announce its rate review on Wednesday.
“Recent remarks from Trump indicating a possible easing of aggressive trade policies, combined with a potentially mild dovish stance from the Fed this week, might create a conducive environment for a rebound in growth-focused assets. Historically, betting on prolonged stagflation has seldom proven successful over the past four decades,” Thielen concluded.