With Inflation on the Rise, Do This to Protect Your Portfolio
Fear of rising inflation has been front and center with interest rates on the rise.
And the Federal Reserve did nothing at yesterday’s policy meeting to relieve those fears.
The Fed keeps talking tough about inflation. Yesterday, new Fed chief Kevin Warsh vowed to bring inflation below the Fed’s 2% target.
But the Fed still left short-term interest rates unchanged yesterday, the same as it did the last five policy meetings.
So, the Fed can talk the talk all it wants but seems reluctant to walk the walk by taking action to curb inflation.
Meanwhile, the bond market did the Fed’s work for it. Yields on the 30-year US Treasury bond spiked to 5.2%, the highest since just before the 2007 financial crisis.
Five percent bond rates are a long way from the Fed’s 2% inflation target, so it’s no wonder investors fear a repeat of that 70s inflation show.
Back then, inflation spiked higher as government spending grew dramatically (sounds familiar).
Consumer prices came down in the mid-70s, but the Fed eased up too soon, and inflation skyrocketed again.
And the path inflation has been on in recent years looks uncomfortably similar to the 1970s!
Inflation is bad news for both consumers and businesses. For you and me, it gets harder to make ends meet as the cost of… well, everything… keeps rising.
And for S&P 500 companies, higher costs eat away at profit margins.
Higher inflation and interest rates also erode the value of stocks. That’s because every dollar of S&P 500 profit is worth less due to a higher discount rate.
And that ultimately spells trouble for stock prices.
That’s why investors today should focus on quality stocks that pay solid dividends. These tend to be inflation-resilient stocks.
In my last column, I talked about Free Cash Flow Yield as a great filter to find quality stocks. Another exceptional indicator is our TradeSmith Business Quality Score (BQS).
Stocks with a superior BQS have financial strength, low debt, consistent sales and profit growth, high returns, and plenty of cash-generating ability.
Stocks like these can maintain solid profit margins even as prices rise.
And if you have access to our TradeSmith Screener, you can quickly and easily search for stocks that fit the bill. Here’s how to do it.
Your Inflation-Resilient Screener
Simply log into your TradeSmith Finance account, and then click on Invest > Screener, then click + Add Filter to build your own inflation-resilient stock screener.
Here are the filters I used…
- Health (Long-Term): Green & Yellow Zone: First, we want only healthy stocks in our Health Indicator Green or Yellow zones. This applies our proprietary measure of risk — the Volatility Quotient (VQ) – along with other powerful algorithms to help you find stocks that can boost your risk-adjusted returns.
- Markets: I’m searching only within the S&P 500 (SPX), but you could always expand your search to include many other indexes.
- Business Quality Score > 75: Our proprietary filter helps guide you to high-quality stocks with more stable earnings, stronger balance sheets, and higher profit margins – traits that tend to outperform other stocks. Setting the filter to > 75 limits our results to only the top 25% of stocks in TradeSmith’s quality rankings.
- Trailing Dividend Yield > 2.5%: Stocks that pay solid, growing dividends return immediate cash to shareholders. And a growing dividend yield is a great antidote to inflation.
S&P 500 stocks today have a paltry dividend yield of just 1.1% on average. But we can do better. That’s why I’m screening for a minimum yield of two and a half times that, or 2.5%
Simply set these filters as shown above, then click on Run Screener to see your results.
When I ran the screen yesterday, I got 19 select results – including some recognizable stocks such as Philip Morris (PM), Accenture (ACN), and Bristol-Myers (BMY), among many others.
Below is a screenshot of the top 10 results from my inflation-resilient screener:
You can expand your list of results by adjusting some of the filter values shown above or adding more stock indexes. And don’t forget to click the Save button (next to Run Screener) to save your screener and filters for future reference.
Mike Burnick’s Bottom Line: Inflation and interest rates are on the rise, and that’s pressuring stocks. One way to help protect your investment portfolio is by focusing on inflation-resilient stocks. Let our exclusive Business Quality Score show you the way.
Good investing,
Mike Burnick
P.S. The Business Quality Score can tell you which companies are built to withstand inflation – but it can’t tell you when to buy them. For that, you need to know what the smart money is doing right now.
Now, spotting when the smart money moves is only useful if you know where to look next. And nobody on our team does that better than my colleague Lucas Downey – editor of the TradeSmith Investment Report.
Lucas has a knack for spotting the theme before the crowd does – and then finding the specific stocks set to ride the hardest. His subscribers have already banked gains of 72.3% on Interactive Brokers (IBKR) and 63.8% on Cadence Design Systems (CDNS) by following that approach.
These days, his focus is squarely on the AI boom, not just the obvious chipmakers, but the second-and third-order plays rippling out across the market as that theme keeps expanding.
Every week, Lucas opens his playbook: what he’s watching, why it matters, and the trades he’s making because of it.