US CPI: Stubborn inflation and possible recession – what should investors do now?

With US inflation remaining stubbornly high, sectors that do well in a stagflationary environment are those that are likely to secure the best returns for investors, says the CEO of one of the world’s largest independent financial advisory and asset management organizations.

The analysis from Nigel Green of deVere Group comes as March’s Consumer Price Index data shows that annual inflation rose by 5.0% year-on-year after increasing by 6% in February. The core reading is at 5.6%, up from 5.5% previously.

He notes: “US headline inflation has slowed lower than expectations, but the core reading is outpacing it, suggesting that underlying inflation is coming down much more slowly.

“As such, we fully expect the FOMC (Federal Open Market Committee) – the branch of the Federal Reserve responsible for implementing monetary policy – will set a quarter-point interest rate hike in May.”

The deVere CEO adds: “Investors will be concerned that not only is inflation remaining stubbornly high, way above the 2% target, but that there are important warning signs of a looming recession in the form of the inverted US Treasury yield curve, which is now in day 193.

“The inverted yield curve suggests a recession is looming because it’s a sign of a tight credit market and weak economic growth.

“The inversion of the yield curve has preceded most US recessions since 1950.

“Against this backdrop of cooling but still sticky-high inflation and fears of a recession, sectors that do well in a stagflationary environment are those that are likely to secure best returns for investors.”

Stagflation is an economic condition where an economy experiences stagnant economic growth and high inflation levels simultaneously. During periods of stagflation, some sectors typically perform better than others. Investors should look for sectors that are less affected by inflation and are more resilient to economic slowdowns.

Nigel Green says: “We’d be looking at four key sectors. These include commodities, such as oil, as their prices typically rise in response to inflation; consumer staples like food, and hygiene products, as demand is likely to remain relatively stable; healthcare, as it provides essential services that are less affected by economic cycles; and utilities, including electricity, gas, and water as demand will also be pretty consistent.”

Early on Wednesday, ahead of the CPI data, the deVere Group CEO urged the US central bank to stop interest rate hikes from next month.

“The Fed could be slowly winning the battle, and officials might now need to take their foot off the brake…It’s time for the Fed to pivot. Will it? I doubt it,” he said.

Nigel Green concludes: “With alarm bells ringing for a recession to hit the world’s largest economy, combined with inflation still remaining high, investors might need to revise their portfolios if they’re not properly diversified.”

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