Stagflation Panic Is Creating Massive Value - 4 Stocks I'd Buy Here

If you study market psychology, you quickly realize that the initial shock of a crisis rarely causes the most damage. The biggest risk is the anxiety that follows. The worst thing for people isn't usually the thing they are afraid of, but the "what-if" cycle that follows. For example, think about the 2020 pandemic crash. When news first broke of a novel virus in Wuhan, global markets barely flinched for weeks. It was only when the unknowns started to multiply that risk assets started to get repriced (they tanked). Back then, the questions shifted from localized containment to existential economic fears: What if global supply chains permanently fracture? How long can governments sustain closed economies before triggering mass corporate defaults? You know, stuff like that.  [Inline image] Source: CNBC Remember when Bill Ackman came on CNBC to make his case? He famously cried when he explained just how bad things could become. On paper, he was entirely right, as the weakness of global supply chains became clear once factories shut down. If we had continued this a bit longer, can you imagine how bad inflation could have gotten?  Luckily, things worked out well, especially for those holding assets. The K-shaped recovery is a different discussion that we’ll have another time.  Today, the market is once again in a “what-if” scenario, triggered by the Iran War, which almost nobody had on their Bingo card going into this year. While some may have expected an escalation in light of the ongoing conflict between Israel and Iran, the extent of this operation was highly unlikely.  That matters because of supply chains, including the Strait of Hormuz, which usually ships a quarter of all seaborne oil and a fifth of all LNG. When you have a massive chunk of global oil and liquefied natural gas passing through a single, highly vulnerable chokepoint, any serious disruption is going to send shockwaves. That’s obvious.  [Inline image] Source: Bloomberg As we have seen over and over again in the past, when oil spikes too hard and too fast, it destroys economic demand. Suddenly, the narrative of smoothly declining inflation is dead in the water, and stagflation is back on the table.  [Inline image] Source: JPMorgan Although we haven’t experienced stagflation in more than 50 years, the fear that we’re now in for price spikes and potentially weaker economic output is enough to scare a market that still trades close to 22x forward earnings.  The Contrarian Pivot: A Stock-Picker's Dream As an equity and macro strategist, whenever I see a sudden wave of bearish headlines and retail panic, I get excited. While the market may be expensive and we’re dealing with serious economic headwinds, I see a lot of favorable developments, especially when it comes to the risk/reward of my favorite investments. As some of you may know, that area is cyclical value stocks. I am convinced that the recent geopolitical turmoil has simply given institutions (smart money) a convenient excuse to trim their expensive winners and aggressively hunt for bargains. Generally speaking, it makes sense for large funds to trim winners when financial risks rise. The chart below shows the Goldman Sachs Financial Conditions Index. [Inline image] Source: Goldman Sachs To me, this is not a market on the verge of total collapse. We are likely looking at a terrific stock picker’s market. The broader indices might chop around and deliver subdued returns as they digest these headwinds, yet underneath the hood, high-quality businesses are on sale.  If this may sound vague, let me explain what I mean. Despite current turmoil and some stocks dropping by double digits in recent weeks, the S&P 500 is less than 5% below its all-time high. That’s because being top-heavy has both pros and cons. The cons were visible in the first two months of this year, as Big Tech was a drag. Now, as investors have dropped cyclical value for some