Stocks are setting up for a third straight losing session after data sparked fears that the economy is losing steam, while the Fed pushes on with interest rate hikes. Or as CNBC commentator Ron Insana put it:
On that front, our call of the day from Jefferies tackles that idea. “Disinflation is a key assumption for our road map for 2023,” says Desh Peramunetilleke, global head of microstrategy, and analyst Mahesh Kedia, in a note to clients on Thursday.
“The 1980s disinflation cycle brought about by higher rates and easing
supply side pressures provide a good template for the current cycle. Broadly, quality growth stocks/sectors did better than value, and small-caps underperformed,” said the pair.
What did well from April 1980 to February 1983 was the consumer, with business services, staples and consumer services outperforming, while commodities and industrials did less well. Buying quality and avoiding value was also a smart move, they add.
As for here and now, the pair say while extreme inflation is usually not great for stocks, moderate inflation can be a better setup. They note a positive correlation over the past 20 years, between monthly S&P 500 returns and the percentage point change in U.S. 10-year inflation expectations.
“Based on the sector correlation with the [10-year inflation expectations,] materials, energy, infotech and industrials are sectors to avoid when inflation is falling, while staples, utilities, communication services and healthcare are in focus,” said Peramunetilleke and Kedia. “Style-wise, investors should avoid GARP (growth at a reasonable price), value and reversion and focus on low risk and quality stocks during falling inflation.”
Reversion refers to a view that any asset over time will return to its average price.
As for stock ideas, Jefferies has some top disinflation plays to consider. First up are those negatively correlated to inflation — Procter & Gamble
Church & Dwight
and Mondelez Intl
Under quality stocks at a reasonable price, they list Visa
and Ulta Beauty
hover at four-month lows on recession worries. The dollar
is also down, along with oil
while gold prices
are inching up. European stocks
have followed Wall Street lower, with much of Asia
also in the red.
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Earnings are ahead from Procter & Gamble
and Fifth Third Bancorp
due after the close.
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Weekly jobless claims, housing starts and the Philadelphia Fed manufacturing index are all on tap for release at 8:30 a.m. Eastern. There will also be three Fed speakers in the day, starting with Boston President Susan Collins, then Fed Vice Chair Lael Brainard and New York President John Williams later.
Also, the U.S. will hit its debt limit on Thursday, and here’s what that means.
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