Thursday, March 7, 2024

Here's your gameplan for managing inflation that won’t go away

Good morning,

The latest readings on consumer and producer prices told investors something they already feared.  

Inflation, which has never gone away, may be returning. 

For much of 2023, the economy was experiencing disinflation. But disinflation only means the rate at which prices are increasing is slowing.  

And now, even that may be changing.  

Inflation is starting to resemble that obnoxious dinner guest who just won't leave your home.  

But you don't have to let it ruin your portfolio. 

We know that artificial intelligence stocks are all the rage. FOMO is running high as investors are piling into stocks like Nvidia.  

Pivoting away from growth stocks means moving away from where the action is. And you'd be right.  

But out-of-control government spending that will continue to inflate our monetary supply makes inflation almost inevitable. It's the definition of too much money chasing too few goods. And investors also have to consider geopolitical tensions and rising oil prices.  

This is the definition of an inflationary market. So, wouldn't it be prudent to allocate at least some of your portfolio to defensive stocks?  

That's the focus of this special presentation. These stocks come from companies that make products consumers can't do without. Analysts expect each of these stocks to do well even if inflation remains muted. But if the rate of inflation ticks higher, these stocks are likely to outpace the market. 


View the 7 Stocks to Buy if Inflation Sticks Around in 2024

MarketBeat Staff
MarketBeat


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Inflation, a term that often evokes concern in the world of finance and economics, refers to the general increase in prices and the corresponding decline in purchasing power over time. When inflation is on the rise, it not only affects the cost of living but also the stock market. For investors, finding stocks that can withstand or even thrive during periods of high inflation is akin to seeking shelter during a storm. The key lies in identifying industries and companies that have the resilience or advantage in such economic conditions.

Firstly, it's essential to understand that during inflation, not all stocks perform equally. Some may suffer due to increased costs or reduced consumer spending, while others may benefit or remain relatively unaffected. Stocks that often do well during inflationary periods are those in sectors that can pass on increased costs to consumers or those that hold tangible assets whose value rises with inflation.

One sector to consider is commodities. Companies in the business of natural resources like oil, gas, metals, and agricultural products often see their prices rise with inflation. This is because these raw materials are in constant demand, regardless of economic conditions, and their prices adjust with inflation. Investing in stocks of well-established commodity-producing companies can offer a hedge against inflation.

Another area to look at is consumer staples. These companies produce or sell essential products like food, beverages, household goods, and hygiene products. While consumer spending may decline in other areas during inflation, spending on essentials tends to remain stable. Companies in this sector, especially those with strong brand loyalty and pricing power, can maintain profitability by passing on higher costs to consumers.

Real estate investment trusts (REITs) also tend to do well during inflationary periods. Real estate is a tangible asset that often appreciates in value with inflation. REITs, which own, operate, or finance income-generating real estate, can benefit from rising property values and the ability to increase rents, which often rise with inflation.

Financial sector stocks, particularly banks and insurance companies, can also be smart choices. Banks can benefit from wider interest rate spreads in an inflationary environment, while insurance companies can invest premiums in assets that appreciate with inflation.

However, investing during inflationary periods requires a nuanced approach. Here are some considerations:

  1. Quality Over Quantity: Focus on companies with strong fundamentals – solid balance sheets, good cash flows, and effective management. These companies are more likely to weather inflationary pressures.

  2. Diversification is Key: While some sectors may outperform during inflation, it's crucial to maintain a diversified portfolio. This helps mitigate risks associated with any single stock or sector.

  3. Monitor Inflation Trends and Economic Policies: Stay informed about inflation trends and economic policies, as these can have significant impacts on different sectors and the stock market as a whole.

  4. Consider the Long-Term Perspective: Investing should always align with your long-term financial goals. Short-term inflationary spikes should not dictate your entire investment strategy.

In summary, investing in stocks during periods of continued inflation involves identifying companies and sectors that are either insulated from or can benefit from rising prices. Commodities, consumer staples, REITs, and the financial sector can offer viable options. However, a focus on company fundamentals, diversified portfolio management, and keeping a pulse on economic trends are crucial for navigating the inflationary landscape successfully. Like any challenging economic condition, inflation presents both risks and opportunities, and the adept investor will seek to balance these with a strategic and informed approach.


 

 
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