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

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,
-2.11%,
Dollar General
DG,
-0.78%,
Walmart
WMT,
-1.43%,
Church & Dwight
CHD,
-1.84%,
McDonald’s
MCD,
-0.92%,
Waste Management
WM,
-0.27%,
Costco
COST,
-2.08%,
Public Storage
PSA,
+0.62%,
Waste Connections
WCN,
-0.95%
and Mondelez Intl
MDLZ,
-1.13%.

Under quality stocks at a reasonable price, they list Visa
V,
+0.43%,
Home Depot
HD,
-3.96%,
Broadcom
AVGO,
-1.93%,
Cisco Systems
CSCO,
-0.94%,
Linde
LIN,
+0.06%,
TJX
TJX,
-0.50%,
Booking Holding
BKNG,
+0.83%,
Altria
MO,
+1.20%,
Boston Scientific
BSX,
+0.82%
and Ulta Beauty
ULTA,
-2.39%.

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

Best of the web

“I no longer have enough in the tank.” A beloved prime minister, who became only the second in the world to give birth while in office, is stepping down.

Banked rainwater is rare benefit of California’s recent deadly and destructive rainstorms.

A 1000-year Tunisian cave village is slowly dying

The chart

Where are the jobs? Florida, apparently.

Random reads

Sprinting legend Usain Bolt lost millions to a scam.

King of Pain? The night before layoffs, Microsoft hosted a Sting concert

New York restaurants are calling time on crazy TikTok menu hacks.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton.