Displaying items by tag: hedge
Whether the US’ current bout of inflation is caused by transitory supply-side factors, or trillions of dollars poured into the economy by policymakers, is irrelevant because investors are now tasked with finding a way through the stock market jitters. As inflation rises it eats at yields and the value of fixed coupons falls. To avoid the pitfalls of rising prices look to dividend stocks, whose yields are pushed higher by inflation. Of course not all dividend stocks are created equal and some will outperform in an inflationary environment. The best income stocks are in the financial sector because they benefit from rising interest rates, as their interest rate margins expand in such environments. Energy is next, at least currently. Higher demand boosts prices of oil and gas, which benefits energy sector investors as it is one of the highest dividend payers. These sectors are the most likely to boost their dividends in the rising price environment.
FINSUM: Dividend stocks have no doubt outperformed just about every segment of the bond market, and expanding your dividend holdings may be a good idea as inflation comes in at 20-year highs.
Investors tend to go to the same old ports to ride out the storm of a recession—gold, Treasuries, healthcare, utilities etc. However, finding a new safe haven can be not only the means to good protection, but also solid capital appreciation. With that in mind here is a very unglamorous, but potentially lucrative idea—buy garbage stocks. We don’t mean bad stocks, we mean stocks of solid waste companies, like Waste Management, Waste Connections, and Casella Waste Systems. Garbage companies are highly recession tolerant (it is not as if there is less garbage), and they tend to throw off huge amounts of free cash flow. Michael Hoffman, an analyst at Stifel is recommending these shares.
FINSUM: This seems like a very good recession hedge. Garbage is a very durable sector. Will this be the next recession star?
Investors will know that the stock market is supposed to be a good inflation hedge, but precious few developed market investors will have ever seen how a market (or people) actually reacts during a period of heavy inflation. For a practical example, look no further than the misery that has befallen Venezuela. Inflation currently stands at 46,000% and is expected to accelerate to 1,000,000%. The government’s printing presses can’t keep up. But how has the stock market performed? The country’s benchmark index is up 73,000% in the last year. Wealthy Venezuelans are using it like a bank, buying stocks to deposit cash, and selling them when they need a withdrawal.
FINSUM: This is something you read about but rarely see in practice. It is an absolute shame what is going on in Venezuela, but a good lesson about the interconnection between stocks and inflation in practice.
Despite all the fears over a trade war, recession, and bear market, there has been relatively little media chatter surrounding gold. Gold is usually seen as a good hedge to political and market calamity, and while it has seen some gains, there isn’t the usual excitement that surrounds it. All of that may be good news, however, for stocks as the spread between gold and platinum suggests the equity bull market has more room to run, according to a pair of professors from Cornell and USC. The gold-platinum ratio reflects both industrial demand and investor anxiety, and when it is high, it tends to indicate that stocks will perform well.
FINSUM: There are a lot of factors that go into the price relationship between two commodities, so it is hard to draw a conclusion for a third asset class. That said, the logic underlying this argument seems sound.
When people think of real estate investing, their most likely areas of focus is on homes, apartments, or various types of commercial buildings. But Barron’s has run a piece chronicling a very well-performing fund that takes an entirely different approach—investing in property where tenants cannot move, at all. To be clear, this means things like data centers, hydroelectric dams, cellphone towers, and lab space. Large casinos also have this immovable characteristic because of the investment it takes to create them. This type of investing approach has yielded very strong returns over the last few years.
FINSUM: Buying into properties where tenants can’t move creates a very strong defense against economic downturn. This is definitely a good hedge to use against many asset classes and can be achieved using REITs.