A hot inflation report has rattled Wall Street and dampened hopes for a number of potential interest rate cuts this year, but there are still areas of the market where investors can take cover if price pressures continue to accelerate. Stocks were sold off on Wednesday, with the Dow Jones Industrial Average falling as much as 500 points at one point after March inflation data came in higher than economists had expected. The 10-year Treasury yield, a benchmark for mortgage loans and credit card debt, rose again to above 4.5%. To protect against stubborn inflation and higher interest rates for a longer period, investors should focus on high-quality companies with high pricing power and risk-adjust the duration of their bonds, according to Wall Street strategists and portfolio managers. Duration refers to the sensitivity of bonds to interest rate movements, usually focusing on short versus medium versus long-term maturities. Pricing Power Companies with high pricing power tend to outperform when inflation rises because they have the ability to defend their profit margins by passing on higher costs to their customers in the end market. “In stocks, you should favor companies with pricing power, i.e. largely technology-capable,” Brad Conger, chief investment officer at Hertel, Callahan & Co., an asset manager overseeing more than $18 billion, said in an email. huge”. Such companies, including those commonly called Big Tech, often enjoy high profit margins and are expected to achieve stable sales growth despite steady inflation. Short-Term Bonds Bills and securities with shorter maturities can become a safer alternative when interest rates rise, as their value remains better than longer-term bonds in a period when inflation sometimes flares up and the Federal Reserve keeps interest rates at low levels. They have to fight rising prices. “If markets are worried about persistent inflation, bond yields are likely to rise,” said Sonu Varghese, global strategist at Carson Group. “In this case, short term (or cash) is a good place to hide.” The two-year Treasury yield, which is 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 fixed income market is Treasury inflation-protected securities. The majority of these securities rise and fall with the movement of the CPI, offsetting the effects of inflation. Issued by the U.S. government, investors can purchase bond insurance bonds with terms of five, ten, or thirty years, with twice-annual payments based on the value of the assets, which is adjusted every six months along with inflation. Investors could also consider so-called fixed-income strategies that can be applied anywhere, and which have the ability to effectively change duration exposure and enter into return opportunities in the future, said Jason Pride, head of investment strategy and research at Glenmede Trust, an asset management firm. Volatile markets. Supervising $44 billion. “When inflation is the dominant risk in markets, correlations between stocks and traditional bonds tend to be high,” Pride said in an email. “As a result, the typical diversification benefits provided by broad exposure to bonds may be less than advertised.” Among the recently introduced and actively managed bond ETFs is the BlackRock Elastic Income ETF (BINC), whose managers include BlackRock's Rick Reeder, global fixed income chief investment officer. BlackRock's iShares strategy team recently argued that investors should take advantage of rises in bond yields while they could be reinvesting their money.
