If inflation starts creeping up like the Fed wants, these are the stocks that could benefit

Published Thu, Dec 17 202010:05 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Bank of America expects a pick up in inflation next year, and it says a group of stocks that do well with inflation have already been outperforming those that don't. On Wednesday, Federal Reserve Chairman Jerome Powell said the central bank will try to get inflation higher, but it will take some effort. "I think you have to be honest with yourself about inflation these days. There are significant disinflationary pressures around the world. And there have been for a while," he said. "It's not going to be easy to have inflation move up. ... It's going to take some time. It took a long time to get inflation back to 2% in the last crisis." Since September, the pro-inflation stocks have outperformed those anti-inflation stocks by 13 percentage points as investors anticipate higher prices because of the Fed's actions and the stimulus enacted by Congress. Investors just don't want too much inflation. In a report by Bank of America strategists and economists, they note that a low single digit inflation environment is "Goldilocks" for stocks. "Inflation will be noisy next year with likely head-fakes in the data. Base effects will result in a short-term inflation burst in 2021 but the medium-term trajectory is likely to be one of modest inflation pressures amid persistent labor slack and anchored inflation expectations," they wrote. "This scenario would likely be driven by a combination of overly stimulative fiscal policy, a slow acting Fed, and damage to the supply side." Bank of America industry analysts are finding companies have been reporting cost pressures from rising prices, mainly from the supply chain, commodities and wage pressures. "Our house forecasts of 1.8% in 2021 and 2.2% in 2022 would be positive for stocks, and we're a long way from inflation being detrimental. Earnings tend to keep pace with inflation, but extreme inflation can hurt margins, consumption and growth," they wrote. "CPI of 1-3% has been the sweet spot for equities; anything lower tends to end badly." The strategists studied year over year relative performance and inflation data from 1975 to the end of August, 2019. Among those in the pro-inflation screen, many were in the cyclical areas, like energy, industrials, and materials. There were also companies in the tech and health care sectors. Some of the stocks on the pro-inflation screen include Apple, Intel, Qualcomm, Western Digital, Oracle, Advanced Micro Devices and Skyworks. Energy names on the list include Haliburton, Noble Energy, Devon Energy, Williams Cos, Hess, and Marathon Oil. Boeing, Deere and Caterpillar were also on the list as were Kansas City Southern, American Tower, MGM Resorts , Mosaic , Alexion Pharmaceutical and Crown Castle. Host Hotels , Autodesk , Celgene and Cummins were also on the list. Many of the anti-inflation stocks were heavily in consumer discretionary, like specialty retail. They were also in pharmaceuticals, financial services, IT services, food and household products sectors. Stocks in the anti-inflation group include Amazon, Best Buy , Amgen, Gap , AutoZone, Home Depot , Kroger Pfizer, Eli Lilly, Bristol-Myers, were also part of the list, as were Darden Restaurants, Clorox, Waste Management, Charles Schwab, Northern Trust, Sherwin-Williams and Campbell Soup .

A worker wrestles a stand of drill pipe into place on a drilling rig near Midland, Texas.

Nick Oxford | Reuters

Bank of America expects a pick up in inflation next year, and it says a group of stocks that do well with inflation have already been outperforming those that don't.

On Wednesday, Federal Reserve Chairman Jerome Powell said the central bank will try to get inflation higher, but it will take some effort.

"I think you have to be honest with yourself about inflation these days. There are significant disinflationary pressures around the world. And there have been for a while," he said. "It's not going to be easy to have inflation move up. ... It's going to take some time. It took a long time to get inflation back to 2% in the last crisis."

Since September, the pro-inflation stocks have outperformed those anti-inflation stocks by 13 percentage points as investors anticipate higher prices because of the Fed's actions and the stimulus enacted by Congress. Investors just don't want too much inflation. In a report by Bank of America strategists and economists, they note that a low single digit inflation environment is "Goldilocks" for stocks.