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

Stocks logged a third-straight losing session on Thursday as investors continue to deal with a mixed bag of economic data.

That followed Wednesday’s session and extremely weak industrial production that sparked fears the economy is losing steam, as the Fed pushes on with interest rate hikes. Or as CNBC commentator Ron Insana put it:

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.

Jefferies, FactSet,

Jefferies, FactSet

“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
Dollar General
Church & Dwight
Waste Management
Public Storage
Waste Connections

and Mondelez Intl

Under quality stocks at a reasonable price, they list Visa
Home Depot
Cisco Systems
Booking Holding
Boston Scientific

and Ulta Beauty

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

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