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

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.

Read: JPMorgan CEO Jamie Dimon sees ‘a lot of underlying inflation,’ rates at 6% in a recession

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.

“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,
-0.87%,
Dollar General
DG,
+0.21%,
Walmart
WMT,
+0.19%,
Church & Dwight
CHD,
-1.44%,
McDonald’s
MCD,
+0.51%,
Waste Management
WM,
+0.22%,
Costco
COST,
-1.32%,
Public Storage
PSA,
+0.90%,
Waste Connections
WCN,
+0.11%
and Mondelez Intl
MDLZ,
+0.18%.

Under quality stocks at a reasonable price, they list Visa
V,
-0.15%,
Home Depot
HD,
-1.85%,
Broadcom
AVGO,
-1.48%,
Cisco Systems
CSCO,
-0.28%,
Linde
LIN,
-0.44%,
TJX
TJX,
-0.24%,
Booking Holding
BKNG,
-0.91%,
Altria
MO,
+0.76%,
Boston Scientific
BSX,
+0.23%
and Ulta Beauty
ULTA,
-1.70%.

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

The markets

Stocks
DJIA,
-0.59%

SPX,
-0.63%

COMP,
-0.76%
have opened in the red, as bond yields
TMUBMUSD10Y,
3.395%

TMUBMUSD02Y,
4.109%
hover at four-month lows on those recession worries. The dollar
DXY,
-0.07%
and oil
CL.1,
+0.38%
are down modestly, while gold prices
GC00,
+0.52%
up slightly. European stocks
SXXP,
-1.39%
followed Wall Street lower, and much of Asia
NIK,
-1.44%
was 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

Weekly jobless claims fell 15,000 to 190,000 in the latest week, while housing starts fell 1.4% in December and building permits dropped 1.6%. Elsewhere, the Philadelphia Fed manufacturing index rose to a negative 8.9 in January from -13.7 in the prior month.

Still to come are three Fed speakers, starting with Boston President Susan Collins, then Vice Chair Lael Brainard and New York President John Williams later.

Alcoa shares
AA,
-4.00%
are tumbling in premarket after reporting a second-straight quarterly loss. Procter & Gamble
PG,
-0.87%
stock is also down after profit met forecasts, but sales volume disappointed. Allstate stock
ALL,
-5.94%
is down after the insurer warned of higher catastrophic losses for the fourth quarter, thanks to December storms.

Netflix
NFLX,
-2.56%
and Costco
COST,
-1.32%
will report 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,
-0.81%
has been hit with a ransomware attack that has forced around 300 U.K. restaurants to close.

Mastercard
MA,
-0.63%
will expanding its partnership with Citizens Financial Group
CFG,
-1.32%
to become the bank’s exclusive payments network, the companies are due to announce Thursday.

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.

The tickers

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

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