A hot inflation report has unsettled Wall Street and dampened hopes of a possible rate cut this year, but there are still areas in the market where investors can hide if price pressures continue to accelerate. Stocks sold off Wednesday, with the Dow Jones Industrial Average at one point falling as much as 500 points after March inflation data came in higher than economists had forecast. The yield on the 10-year Treasury note, a benchmark for mortgages and credit card debt, climbed back above 4.5%. To protect against persistent inflation and higher interest rates over the longer term, investors should focus on quality companies with strong pricing power and adjust bond duration risk, according to Wall Street strategists and portfolio managers. Duration refers to a bond’s sensitivity to changes in interest rates and typically focuses on short, medium and long term maturities. Pricing Power Companies with high pricing power tend to outperform when inflation rises because they have the ability to protect their profits by passing on higher costs to their end consumers. “In stocks, you should favor companies that have pricing power, i.e. mostly mega-cap tech,” Brad Conger, chief investment officer at Hirtle, Callaghan & Co., an asset manager with more than 18 assets, said in an email. billions of dollars. Such companies, including those commonly referred to as Big Tech, often have high profit margins and are expected to generate stable sales growth despite persistent inflation. Short-term bonds. Notes, notes and bonds with shorter maturities can be a safer alternative when rates rise because they hold up better than bonds with longer maturities during times when inflation sometimes flares and the Fed holds rates when they should be struggling with higher prices. “If markets are concerned about persistent inflation, bond yields are likely to rise. In this case, short duration (or cash) is a good place to hide,” said Sonu Varghese, global macro strategist at Carson Group. The yield on two-year Treasuries, the most sensitive to monetary policy, jumped 20 basis points to 4.95% on Wednesday after the March inflation report. TIPS and more A direct hedge against inflation in the bond market is Treasury Inflation Protected Securities. The bulk of these securities rise and fall with movements in the consumer price index, offsetting the effects of inflation. Issued by the U.S. government, investors can buy TIPS with terms of five, 10 or 30 years, with biannual payments based on asset values that are adjusted every six months with inflation. Investors could also consider so-called fixed-income strategies, which allow them to actively vary the duration of exposure and take advantage of return opportunities in volatile markets, said Jason Pride, head of investment strategy and research at asset manager Glenmede Trust. controlling $44 billion. “When inflation is the predominant risk in markets, the correlation between stocks and traditional bonds tends 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 the recently introduced actively managed bond ETFs is the BlackRock Flexible Income ETF (BINC), whose managers include BlackRock’s Rick Rieder, chief investment officer of its global fixed income division. BlackRock’s iShares strategy group recently said investors should take advantage of the spike in bond yields while they can and reinvest their money.
