The U.S. economy has avoided entering a recession, despite continuously rising inflation through 2022 and many forceful interest rate increases from the Federal Reserve. According to the Bureau of Economic Analysis’s most recent GDP estimates, the U.S. economy grew by 3.2% in the three months to September 2022. The fourth quarter’s advanced estimate calls for a 2.9% increase, with results to be announced on February 23. Others hold differing opinions, despite Federal Reserve Chair Jerome Powell’s efforts to guide the economy towards a “soft landing” that curbs inflation and prevents a recession.
Roger Aliaga-Diaz, chief economist for the Americas and director of portfolio optimization at Vanguard, said, “our baseline assumptions are for inflation to drop towards a goal over the next several years at the cost of a recession.” Despite this, stagflation, which Aliaga-Diaz characterizes as “a period of consistently above-target inflation paired with stagnant or outright negative GDP growth,” is still a potential worst-case scenario for the U.S. economy. According to Daniel Dusina, director of investments at Blue Chip Partners, “Stagflation is difficult to address from a policy perspective, as decisions that counteract rising prices (i.e., higher interest rates, reducing the supply of money) may exacerbate the levels of unemployment and slow the economy further.”
Investors need to be aware that stagflation might result in losses for stocks. Rising inflation, high unemployment, and poor demand are the three factors that makeup stagflation, according to Dusina. These factors affect a company’s revenue, profitability, and share price. Thankfully, specific equities sectors may be more resilient to stagflation than others. Investors may be able to lessen the effects of stagflation on existing portfolios by “tilting” or overweighting equities from specific industries.
Costco Wholesale Inc. (COST)
According to Anessa Custovic, a chief investment officer of Cardinal Retirement Plans Inc., “Companies which may do well in stagflationary conditions would likely be exceptionally diverse in their product lines.” Because of their size or the fact that they have their supply of materials, she adds, “These firms often have stable balance sheets and constant income and can control expenses better than other companies.” An excellent illustration is COST, which sells food, health care items, tools, appliances, electronics, furniture, jewelry, tires, and even fuel using a subscription approach. From 2012 through 2022, Costco’s yearly profitability increased steadily along with its significant revenue growth. The business manufactures its renowned $1.50 hot dogs on-site to maintain that cheap pricing.
NextEra Energy Inc. (NEE)
According to NextEra Energy Inc. (NEE), high unemployment is a result of stagflation. In the absence of other factors, rising unemployment forces consumers to reduce spending to keep afloat. Custovic notes that although consumers may be cutting back on spending, they seldom let their power payments go unpaid. Maintaining water and electricity is a top concern for most customers. Utility sector businesses like NEE typically make more reliable defensive investments because of this inelastic demand. Florida is home to a sizable client base for NEE, which uses non-renewable and renewable energy sources to supply power. In addition, NEE offers a dividend yield of 2.3%, which is advantageous to investors during periods of stagnant market prices.
Crown Castle Inc. (CCI)
The strong growth of real estate during the 1970s stagflation is cited by Crown Castle Inc. (CCI) Dusina as a possible refuge. Data center REITs may pass the majority of power cost hikes to their clients. In contrast, according to the author, cell tower REITs can rely on the protective telecommunications sector as a “mission vital” clientele. CCI, which owns, manages, and rents more than 40,000 cell towers and more than 900 data centers across the U.S., is a large-cap real estate investment trust (REIT) selection that meets the bill here. The REIT also has a robust fiber optic network that covers more than 80,000 miles. The transition of CCI’s tenants to 5G and cloud in recent years has been advantageous. CCI yields 4.2% and offers an enticing dividend, like most REITs.
Pfizer Inc. (PFE)
Ryan Johnson, managing director of investments at Buckingham Counselors, claims that stagflation-resistant businesses have two traits: strong pricing power, which frequently results from providing necessities, and strong free cash flow generation, which offers security when the cost of capital and borrowing money is high. Healthcare is a field that frequently displays both of these traits. According to Allen Bond, managing director, and portfolio manager of Jensen Investment Management, “When it comes to health care companies, we prefer PFE.” Because of its robust free cash flow, “PFE has a solid portfolio of pharmaceuticals with high sales and a feasible plan for replenishing its pipeline by taking up late-stage biopharma startups,” according to Bond. The firm has a 3.7% dividend yield.
TJX Cos. Inc. (TJX)
Consumer discretionary businesses like shops typically suffer when stagflation reduces consumer spending, although some generally are better prepared to withstand reductions in demand. Discount shops, in particular, often perform better than those that don’t have excellent price power. TJX, a well-known international off-price retailer, is a good example of such a business. As the world’s biggest off-price company, TJX has substantial negotiating power with suppliers, enabling them to set inventory pricing based on the revenue they can expect from client purchases, according to Bond. According to him, the end consequence is implicit and apparent pricing power, which enables them to raise prices in response to cost constraints. TJX now pays a meager 1.5% dividend.
Barrick Gold Corp. (GOLD)
According to Massud Ghaussy, senior analyst at Nasdaq IR Intelligence, “Stagflation is an uncommon phenomenon in U.S. economic annals with the 1970s acting as the lone blueprint.” “A rush to quality and secure havens expressed itself at that time in gold, the yellow metal recording stratospheric returns despite considerable volatility,” says the author. While buying the shares of massive gold miners like GOLD is another option, investors may also invest in gold directly. Gold miner stocks provide access to gold prices and the chance to gain from rising share prices and dividends. For example, GOLD offers a respectable yield of 2.2% while having a low beta of 0.44, which measures sensitivity and volatility concerning the market.
Apple Inc. (AAPL)
A track record of steady profitability is one trait shared by businesses resistant to stagflation. According to Dusina, “generating stable and increasing levels of earnings and free cash flows through various sorts of bad economic circumstances might suggest that management can properly invest resources while keeping a competitive edge in their business.” Few businesses consistently generate free cash flow and are as profitable as Apple, the most significant member of the S&P 500 index. Apple has a profit margin of 24.6%, a trailing-12-month operating profit of 29.4%, and an operating cash flow of $109.2 billion. In its balance sheet as of the most recent quarter, Apple had more than $51 billion total cash.
