Where investors might hide out if inflation continues to reaccelerate

Published Wed, Apr 10 20241:33 PM EDTUpdated Wed, Apr 10 20242:57 PM EDT

A hot inflation report rattled Wall Street and diminished hopes for the number of rate cuts likely this year, but there are still areas in the market where investors can hide out if price pressures keep reaccelerating. Stocks sold off Wednesday, with the Dow Jones Industrial Average tanking as much as 500 points at one point after March inflation data came in above economist forecasts. The 10-year Treasury yield, a benchmark for mortgage loans and credit card debt, soared back above 4.5%. To guard against stubborn inflation and higher-for-longer interest rates, investors should focus on quality companies with high pricing power and adjust their duration risk in bonds, according to Wall Street strategists and portfolio managers. Duration refers to a bond's sensitivity to interest rate moves, and usually centers on short- vs. medium- vs. long-term maturities. Pricing power Companies with high pricing power tend to outperform when inflation is elevated because they have the ability to defend their profit margins by passing along higher costs to their end market customers. "In equities, you should prefer companies that have pricing power, i.e. largely mega cap technology," Brad Conger, chief investment officer at Hirtle, Callaghan & Co., an asset manager overseeing more than $18 billion, said in an email. Such companies, including those usually called Big Tech, often have high profit margins and are expected to generate stable sales growth despite sticky inflation. Short-duration bonds Bills, notes and bonds with shorter-dated maturities could become a safer alternative when rates are rising, as their value holds up better than longer-dated bonds in a period when inflation sometimes flares up and the Fed is keeping rates where they are to fight higher prices. "If markets are worried about inflation being persistent, bond yields are likely to move higher. In which case being short duration (or cash) is a good place to hide out," said Sonu Varghese, global macro strategist at Carson Group. The two-year Treasury yield, the most sensitive to monetary policy, jumped 20 basis points to 4.95% Wednesday following the March inflation report. TIPs & more A direct hedge against inflation in the fixed-income market is Treasury Inflation-Protected Securities. The principal portion of these securities rises and falls alongside the movement in the consumer price index, offsetting the effects of inflation. Issued by the U.S. government, investors can buy TIPS at five-, 10- or 30-year terms, with twice-annual payments based on the assets' value, which adjusts every six months along with inflation. Investors could also consider so-called go-anywhere fixed-income strategies, which have the latitude to actively alter duration exposure and step into yield opportunities in volatile markets, said Jason Pride, chief of investment strategy and research at Glenmede Trust, an asset manager overseeing $44 billion. "When inflation is the predominant risk in markets, correlations between stocks and traditional bonds tend to be high. As a result, the typical diversification benefits offered by broad bond exposure may be less than advertised," Pride said in an email. Among recently introduced, actively managed bond ETFs are BlackRock Flexible Income ETF (BINC) , whose managers include BlackRock's Rick Rieder, chief investment officer of global fixed income. BlackRock's iShares strategy team recently argued that investors should take advantage of spikes in bond yields while they can and reinvest their cash.