A red-hot inflation report has rattled Wall Street and dampened hopes for a possible number of rate cuts this year, but there are still areas in the market where investors can hide if price pressures continue to accelerate. Stocks sold off on Wednesday, with the Dow Jones Industrial Average falling as much as 500 points after inflation data for March came in higher than economists forecast. The yield on the 10-year Treasury note, a benchmark for mortgage and credit card debt, surged above 4.5%. To protect against stubborn inflation and longer-term higher interest rates, investors should focus on high-quality companies with high pricing power and adjust bonds for duration risk, Wall Street strategists and portfolio managers said. Duration refers to a bond’s sensitivity to changes in interest rates, and is typically focused on short-, medium-, and long-term maturities. Pricing Power When inflation rises, companies with high pricing power tend to outperform because they have the ability to defend margins by passing higher costs on to end-market customers. “When it comes to stocks, you should prefer companies that have pricing power, which is primarily large tech companies,” Brad Conger, chief information officer at Hirtle Callaghan & Co., said in an email , Hirtle Callaghan & Co. is an asset management firm with more than $18 billion in assets under management. Such companies, including those often referred to as “Big Tech,” typically have high profit margins and are expected to achieve steady sales growth despite high inflation. Short-Term Bonds When interest rates rise, shorter-term notes, notes, and bonds may become safer bets because they are worth less than longer-term bonds during periods when inflation sometimes spikes suddenly and the Federal Reserve keeps interest rates at appropriate levels. better. is to combat higher prices. “Bond yields are likely to move higher if markets are worried about persistent inflation. In that case, short-term bonds (or cash) are a good place to hide,” said Sonu Varghese, global macro strategist at Carson Group in March. Following the release of the inflation report, the two-year Treasury yield, which is most sensitive to monetary policy, rose 20 basis points to 4.95% on Wednesday. Tips and More A direct hedge against inflation in the fixed income market is Treasury inflation-protected securities. Major tranches of these securities rise and fall with changes in the Consumer Price Index, offsetting the effects of inflation. TIPS are issued by the U.S. government, and investors can purchase TIPS with five, 10, or 30-year maturities, with payments made twice a year based on the asset value, which is adjusted for inflation every six months. Jason Pride, head of investment strategy and research at asset manager Glenmede Trust, said investors could also consider so-called “everywhere” fixed-income strategies, which proactively vary duration exposures and trade in Seize profit opportunities in volatile markets. Managers manage $44 billion. “When inflation is a major risk in the market, the correlation between stocks and traditional bonds tends to be high. Therefore, the typical diversification benefits provided by broad bond exposure may be less than advertised,” Pleasant said. De said in an email. Recently launched actively managed bond ETFs include the BlackRock Flexible Income ETF (BINC), managed by Rick Rieder, chief investment officer of global fixed income at BlackRock. BlackRock’s iShares strategy team recently argued that investors should take advantage of the surge in bond yields and reinvest their cash when they can.
