Energy, materials and resource stocks are a decent hedge against inflation, this strategist says

Published Wed, Sep 14 20229:38 AM EDT

High-quality value stocks, lower credit risk and sectors that benefit from "stickier" inflation are three key themes for investors in today's market, according to Michael Arone, the chief investment strategist for U.S. SPDR funds at State Street Global Advisors. Inflation will likely fall quickly but remain above a comfortable level for Federal Reserve officials, Arone said from the sidelines of the Future Proof conference in Huntington Beach, California. Inflation in the services sector — largely housing, shelter and rent — will likely persist for a while, or fall less rapidly, even if other inflationary factors such as food, energy and products improve in the near term. "Investors would benefit from having some inflation beneficiaries," Arone said. Energy, materials and global natural resource stocks are three sectors that traditionally benefit, but even more so now against the backdrop of a transition away from fossil fuels to alternative energy sources, which will accelerate long-term demand for metals, mining and natural resources, Arone said. The Inflation Reduction Act, which President Biden signed in August, will likely hasten that shift, he added. The Energy Select Sector SPDR Fund (XLE), SPDR S & P Metals & Mining ETF (XME) and SPDR S & P Global Natural Resources ETF (GNR) are three exchange traded funds investors could leverage, Arone said. High-quality value stocks are also well-positioned as investors fret over a potential recession, Arone said. The stock market generally rallies before economic data hits rock bottom as investors anticipate better days ahead. Value stocks generally fare well in the early stages of economic recovery, Arone said. Assessing quality is often in the eye of the beholder, he said. Arone looks for value companies with "very healthy" balance sheets, stable earnings (i.e., low earnings variability), dividend payers or those that are growing their dividends (a signal of financial strength), and with low debt to equity ratios. The SPDR S & P Dividend ETF (SDY) is a good proxy for quality value stocks, he said. Fixed income investors concerned about economic risk — and the volatility and earnings challenges it presents — should consider reducing their credit exposure and moving up in quality, Arone said. He recommends shifting to shorter-duration Treasuries and high-quality investment grade corporate bonds, and steering away from more speculative corporate bonds, Arone said. The SPDR Portfolio Short Term Treasury ETF (SPTS) and SPDR Portfolio Short Term Corporate Bond ETF (SPSB) are ways to find those qualities in fixed income, he said.