Inflation won’t go away – and the stock market is reeling. However, some stocks could benefit if inflation remains stable.
Investors got a shock on Tuesday when the consumer price index for August hit the wires. It showed prices rose 8.3% year-on-year, beating expectations for 8.1%. Although it was the second month in a row that the pace of price growth eased, while the core CPI, which excludes food and energy, rose 6.3%, beating forecasts for 6.1%.
This caused the stock market to crash. The
fell by 34.3%, while
fell by 1276.37 points, or 3.9%, a
It’s not hard to see why markets might dislike inflation. Rising costs are hurting companies’ profit margins, while price increases can hurt consumer demand. But the real fear is that the Federal Reserve will have to raise interest rates even more as it tries to reduce demand to fight inflation.
The good news is that there are some stocks that can still benefit from inflation. The MSCI Inflation-Exposed Portfolio has outperformed the MSCI USA Index since inflation became prevalent in the first half of 2021. The heaviest weights in this portfolio are stocks in the energy, materials and industrials sectors, sectors that have outperformed this year .
Oil is an example of the stock market inflation game. The
( XLE ), which includes oil producers and pipeline providers, has gained 31% for the year. Meanwhile, the MSCI USA was down more than 14%. Some of the widespread inflation was caused by rising oil and gas prices, which boosted producer profits.
The materials sector also benefited from strong prices. Nucor (NUE), a producer of steel and a component of
(NUE), has gained 21% this year. The company said in its latest earnings call that it raised prices aggressively, enough for analysts to forecast sales growth of 16% to $42.3 billion in 2022, according to FactSet. While the company’s gross margin should decline by about a percentage point year over year as costs rise, operating profit should still grow by 18%.
Some industrial stocks should also get a boost from higher prices. Shares of
Deere & Co
(DE), a maker of agricultural vehicles, has gained 8% this year. It is the products are premium enough to allow the company to raise prices without losing customers. That’s exactly what the company has done, as analysts expect 2022 sales to grow 17% to $47.9 billion and gross margin to expand.
There is one caveat though. With all that inflation driving higher interest rates, the economy could suffer enough demand destruction that product volumes and prices take a hit. That’s why the majority of stocks in the S&P 500, according to FactSet, took a hit on Tuesday. And that includes the stocks mentioned above. The silver lining is that these stocks still have the best chance of using inflation to keep earnings more stable than other companies can.
At the very least, they could outperform the market — even if they fall.
Write to Jacob Sonnenschein at [email protected]