The 1980s was the blueprint for the upcoming disinflation cycle and these are the stocks for it, strategists say

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.


Jefferies, FactSet, multpl.com


Jefferies, FactSet

“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
PG,
Dollar General
DG,
Walmart
WMT,
Church & Dwight
CHD,
McDonald’s
MCD,
Waste Management
WM,
Costco
COST,
Public Storage
PSA,
Waste Connections
CA:WCN
and Mondelez Intl
MDLZ.

Under quality stocks at a reasonable price, they list Visa
V,
Home Depot
HD,
Broadcom
AVGO,
Cisco Systems
CSCO,
Linde
LIN,
TJX
TJX,
Booking Holding
BKNG,
Altria
MO,
Boston Scientific
BSX
and Ulta Beauty
ULTA.

Opinion: This perfect storm of megathreats is even more dangerous than the 1970s or the 1930s, Roubini says

The markets

Stock futures
ES00

YM00

NQ00
are dropping as bond yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
hover at four-month lows on recession worries. The dollar
DXY
is also down, along with oil
CL,
while gold prices
GC00
are inching up. European stocks
XX:SXXP
have followed Wall Street lower, with much of Asia
JP:NIK
also in the red.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Alcoa shares
AA
are tumbling in premarket after reporting a second-straight quarterly loss. Procter & Gamble
PG
stock is also down after profit met forecasts, but sales volume disappointed. Fastenal
FAST,
Northern Trust
NTRS
and Fifth Third Bancorp
FITB,
with Netflix
NFLX
and Costco
COST
due after the close.

Netflix’s unpredictable finale: With no more subscription guidance, the focus is on financial estimates

KFC and Taco Bell parent Yum Brands!
YUM
has been hit with a ransomware attack that has forced around 300 U.K. restaurants to close.

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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The chart

Where are the jobs? Florida, apparently.


@JosephPolitano

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

Ticker

Security name

TSLA Tesla

BBBY Bed Bath & Beyond

GME GameStop

AMC AMC Entertainment

AAPL Apple

APE AMC Entertainment preferred shares

NIO NIO

MULN Mullen Automotive

AMZN Amazon

HKD AMTD Digital

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