By Jack Denton
Stocks are mixed on Thursday, as markets absorb the Federal Reserve’s indication that interest rate increases are coming sooner than expected, while the central bank remains alert to inflation risks.
“There is probably no bigger macro issue, both tactically and strategically, than inflation and what this means for portfolios,” said strategists led by Inigo Fraser Jenkins at Bernstein Research on Thursday.
Fraser Jenkins and his team have our call of the day : that investors should look to buy shares in companies with a long maturity of debt as an effective hedge against inflation.
Companies issued debt at an astounding rate through the COVID-19 pandemic. Much of it was a necessary move to meet funding needs, but for some groups it was an opportunity to take advantage of the Fed’s measures supporting credit markets, which provided an ability to increase the maturity of debt, the strategists said.
According to the team at Bernstein, for companies that have long maturity of debt, have issued fixed-rate debt, and are going concerns — i.e. can continue operating while meeting financial obligations — inflation could be a positive thing. “Inflation would erode the real value of the debt relative to earnings (which are tied to the real economy),” the strategists said.
“There is no one solution” to finding suitable hedges for inflation, Fraser Jenkins’ group said, noting that a good response may involve more equities, real assets, gold, and even crypto assets like bitcoin /zigman2/quotes/31322028/realtime BTCUSD -1.73% . But “another possible string to the inflation-hedging bow” is companies that emerge from the pandemic with a long maturity of debt.
“A basket of U.S. long debt maturity stocks has outperformed a basket of short debt maturity stocks by 7% this year and trades at more attractive valuations than their short debt maturity peers,” Fraser Jenkins and his team added.
There are a lot of these stocks: the strategists at Bernstein have a list of more than 80. Some of those picks include Big Tech names Apple /zigman2/quotes/202934861/composite AAPL +0.15% , Alphabet /zigman2/quotes/202490156/composite GOOGL -0.77% /zigman2/quotes/205453964/composite GOOG -0.97% , Amazon /zigman2/quotes/210331248/composite AMZN -7.56% , and Microsoft /zigman2/quotes/207732364/composite MSFT -0.55% , as well as other technology companies like videogame developer Electronic Arts /zigman2/quotes/206954087/composite EA +0.40% and semiconductor groups Nvidia /zigman2/quotes/200467500/composite NVDA -0.83% , Texas Instruments /zigman2/quotes/202237907/composite TXN +0.42% , and Qualcomm /zigman2/quotes/206679220/composite QCOM -0.79% .
Telecom giants AT&T /zigman2/quotes/203165245/composite T -0.85% and Verizon /zigman2/quotes/204980236/composite VZ -0.36% are also on the list, as are retailers and consumer-products groups such as Home Depot /zigman2/quotes/208081807/composite HD +0.23% , Target /zigman2/quotes/207799045/composite TGT -0.23% , McDonalds /zigman2/quotes/203508018/composite MCD -0.54% , Starbucks /zigman2/quotes/207508890/composite SBUX -0.78% , Nike /zigman2/quotes/203439053/composite NKE +0.31% , Kraft Heinz /zigman2/quotes/203625533/composite KHC -1.31% , Estée Lauder /zigman2/quotes/200740220/composite EL +0.07% , and Coca-Cola /zigman2/quotes/209159848/composite KO -0.04% .
Health and biotechnology stocks like Johnson & Johnson /zigman2/quotes/201724570/composite JNJ +0.01% , Pfizer /zigman2/quotes/202877789/composite PFE +0.05% , Gilead Sciences /zigman2/quotes/210293917/composite GILD -2.21% , Regeneron /zigman2/quotes/203149337/composite REGN -1.46% , and Biogen /zigman2/quotes/201531540/composite BIIB -0.74% also make the cut, as do railroad operators Kansas City Southern /zigman2/quotes/200211518/composite KSU +1.43% and Union Pacific /zigman2/quotes/209717171/composite UNP +0.66% . Defense companies Lockheed Martin /zigman2/quotes/200691238/composite LMT -0.25% , Northrop Grumman /zigman2/quotes/205518355/composite NOC -0.72% , and Raytheon Technologies /zigman2/quotes/203237915/composite RTX -0.80% also qualify.
U.S. stocks /zigman2/quotes/210598065/realtime DJIA -0.42% /zigman2/quotes/210599714/realtime SPX -0.54% /zigman2/quotes/210598365/realtime COMP -0.71% were mixed by midday, as markets react to the Fed’s shifting position on interest rates . European equities /zigman2/quotes/210599654/delayed XX:SXXP -0.45% /zigman2/quotes/210598409/delayed UK:UKX -0.65% /zigman2/quotes/210597958/delayed FR:PX1 -0.32% /zigman2/quotes/210597999/delayed DX:DAX -0.61% were also mixed, as were Asian stocks /zigman2/quotes/210597971/delayed JP:NIK -1.80% /zigman2/quotes/210598030/delayed HK:HSI -1.35% /zigman2/quotes/210598127/delayed CN:SHCOMP -0.42% .
Gold futures /zigman2/quotes/201432642/composite GOLD -0.18% were down 4.5%, as the price of the yellow metal tumbled after the Fed’s policy statement .
Money that investors borrow from brokers to buy securities or take short positions jumped by $14 billion last month to a historic $862 billion, and is up by $202 billion in seven months. Our chart of the day, courtesy of Wolf Richter at the Wolf Street financial blog , shows this meteoric rise in stock-market margin debt.
“What is important is the trend — the steep increase before every stock-market selloff,” Richter said. “Margin debt is the only known stock-market leverage measure that we have, and is only an indicator of the trend in overall stock-market leverage. It just shows the tip of the iceberg.”
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