Inflation Fighting Stocks to Buy Before the Fed’s Next Move

As is usually the case I spent some time watching a few of the financial media channels on Friday, listening to the “hot news” of the day.

I loved that there were mentions of Palantir (PLTR) and MicroStrategy (MSTR) making their way into the Nasdaq 100 as well as other exciting stock stories, but there was something missing.

No talk about Bonds, about what was going on with the “market” rates. Not a simple mention of what is going on in the most important market in the world.

Less than a week away from the Fed’s last interest rates meeting of the year. A week away from the Fed possibly becoming a little more politicized even though that’s not supposed to happen.

I know, it’s boring talk, but there’s times when you need to listen to boring.

The Bond Market is Boring, But Critical
There are a few reasons that the bond market is critical.

First off, bonds are bigger, at least the bond market is bigger.

More capital is generated in the bond market through its offerings from both the public and private issuers. The weekly bond market auctions that take place for our government’s debt can turn the stock market on a dime when there’s a “bad” auction.

Beyond those momentary reactions to a band auction, the bond market can significantly influence the stock market due to its impact on interest rates and investor sentiment.

When bond yields rise, indicating higher returns on bonds, investors historically shift their funds from stocks to bonds, seeking safer returns. This can lead to a decline in stock prices.

Conversely, lower bond yields might make stocks more attractive due to their potential for higher returns, boosting the amount of money moving into stocks which results in higher prices.

Additionally – and this is extremely important – bond market trends can affect economic expectations.

Rising yields may signal inflation or strong economic growth, while falling yields might indicate economic slowdowns, influencing corporate earnings and stock market performance.

The Bond Market Just Zigged While the Fed is Zagging
We’re just a few days away from the Fed’s last interest rate meeting of 2024.

According to current Fed Funds Futures trading, the market is pricing in a 97.1% chance that the Fed will lower interest rates on Wednesday.

The futures market isn’t wrong, interest rates are coming down on Wednesday.

But what the Futures market isn’t telling you is what Jerome Powell is going to say during his 60-minute or so press conference following the Fed’s move to cut rates.

The bond market is telling you what Chairman Powell is likely to say. And that news isn’t what investors want to hear.

Bond market investors are telling you that interest rates are going higher in 2025, not lower.
Bonds have been trying to claw their way out of a long-term bear market for the last six months.

The iShares 20+ Year Treasury Bond ETF (TLT) moved above its 20-month moving average in July. I’m sure that you’ll recall what happened in July, right?

The Fed started easing its outlook on interest rates, setting the path for their first interest rate cut in years that came in September.

Since then, interest rates have been lowered twice – for a total of -0.75% – with a third cut coming on Wednesday afternoon.

Jerome Powell has become a little less sure about where rates are heading in 2025, but the bond market hasn’t.
Historically, a dovish Fed – a Fed that looks to lower rates as inflation continues to curb – will lead to a rally in the bond market as bond investors buy bonds ahead of a lower interest rate environment.

That’s not happening right now. We’re seeing the opposite in the bond market right now as the 20+ Year Treasury Bond ETF (TLT) is preparing to slip back into a long-term bear market trend.

That means the bond market is preparing for rates to go higher by selling bonds with the plan that they will be able to buy the same bonds at lower prices over the next 3-6 months, locking in higher interest rates.

There’s a reason that the bond traders are the smartest in the room!

Yields on Short-Term Fixed Income Investments are Faltering too
Last week, we saw short-term interest rates move higher as the latest Consumer Price Index (CPI) and Producer Price Index (PPI) data was released.

While CPI numbers were in line with expectations that show inflation has been slowing, the Producer Price Index data was “warmer” that economists had expected.

The higher PPI gives implications that the Fed will find it harder to bring inflation down further with rates where they are now.

Another factor in the bond market’s about-face into a bearish trend are the implications of the incoming administration’s tariff talks. President-Elect Trump has proposed several tariffs that would potentially increase the risks of inflation in 2025.

Examples include his plans include imposing a universal baseline tariff of 10% to 20% on all imports, with higher tariffs of up to 60% – specifically targeting imports from major trading partners like China, Mexico and Canada.

Economists are already warning that such tariffs would raise the consumer’s cost of imported goods, leading to higher prices. Goldman Sachs has estimated that these tariffs could drive inflation up by nearly 1%.

These are just a few of the drivers behind the bond market’s move back into a bear market.

How to Prepare for another Bond Market Bear Run
Take a page from what we saw in early 2021 and 2023.

Interest and dividend yielding investments will see increased demand again. Investors will begin to forage for income generating investments again as the risk outlook for equities begins to increase.

In 2022 we saw the Magnificent Seven stocks take the weight of the market on their shoulders, minimizing the risk of severe declines in stocks. That wouldn’t be the case this time around.

Artificial Intelligence, as a driver of valuation, has already been priced into the Mag Seven and other technology stocks. This puts them in a different risk scenario this time around as investors would be more likely to sell these stocks at their high valuations.

That selling pressure would turn into buying strength for income and dividend yielding stocks.

The iShares Dividend Gains Even More Value in this Scenario
The iShares Dividend ETF (DVY) offers a first line of offense against another bond market bear.

Higher demand for “safe haven” investments and higher income yields will once again put investors back in the mood to buy companies like Altria (MO), AT&T (T) and Verizon (VZ). These are just a few of the top holdings of the iShares Dividend ETF.

As a group, the companies in the dividend ETF typically trade with less volatility providing investors with steadier portfolio values and higher income.

iShares Dividend ETF prices are trading at significant technical support at $137.50.

Shares are perched on their 50-day moving average which is currently in a bullish trend itself.

The current test of the DVY’s 50-day is the fifth in the last year. Each previous test led to another step higher for the DVY shares.

Target Stocks that will Benefit from Inflation
Kroger (KR) and Walmart (WMT) are among the stocks that benefitted from higher prices in 2022. There are two opportunities for these grocers should the market have to deal with another spate of inflation.

First, both companies are simply a conduit for higher prices. Neither Walmart nor Kroger really benefits from the pricing changes outside of the higher prices providing higher revenue (not adjusted for inflation of course) to their bottom lines.

Both Kroger and Walmart are highly efficient when it comes to their operations as they take advantage of automation and scale. This helps maintain the companies’ margins during inflationary periods.

Second, Both Walmart and Kroger offer their own private label brands. Higher prices at the hand of inflation turn consumers’ attention to these products which produce a higher margin for the grocers.

In 2022, Kroger reported increases of 10.2%, 10.1% and 10.4% for their private brand products. The consistent double-digit growth helps Kroger obtain market share from larger national brands. Historically, consumers will develop a relationship with these products, helping to maintain wider margins for the company moving forward.

Kroger shares are in the process of revaluating after the company’s failed attempt to merge with Albertson’s. Last week, Albertson’s withdrew their merger plans with Kroger after antitrust scrutiny from the Federal Trade Commission.

Shares of Kroger immediately bounced after headlines of the failed merger hit the wires along with news that Albertson’s would be filing claims against Kroger.

Shares of Kroger remain in both a long- and intermediate-term bull market trend.

The stock is currently building momentum as shares are likely to move higher above the $65 price.

Analysts are relatively bullish on the stock, though investors are likely to see upgrades as we move through 2025. Currently, only 48% of the Wall Street analysts covering the stock have it ranked as a “Buy”. This leaves plenty of room for upgrades to drive Kroger stock prices higher.

The stock maintains a bullish outlook with a price target of $75.00.

— Chris Johnson

Source: Money Morning