Stocks have had one of their worst starts to the year in history amid the looming threat of stagflation—persistently high inflation coupled with stagnant economic growth, but analysts say it’s time to buy companies with high dividend yields and strong cash flows that will outperform the rest of the market.
With surging inflation and geopolitical uncertainty from Russia’s invasion of Ukraine already dragging markets lower this year, most experts are now warning that the economy is about to be plagued by stagflation and recession risks are rising.
Top Goldman Sachs strategist Christian Mueller-Glissmann says, stagflation, a situation in which inflation is high, economic growth slows and unemployment remains elevated, is already here.
With stagflation looming, “cashflow and balance sheets are coming into focus,” according to analysts at Jefferies, who point out that stocks with high-dividends that are “cash machines” typically outperform the market during periods of high inflation and slowing economic growth.
The firm recommends healthcare picks such as Pfizer and Medtronic, as well as several consumer companies including Procter & Gamble, Best Buy, Hasbro and Home Depot.
Goldman Sachs, meanwhile, recommends stocks that have been beaten-down in recent months and now look cheap, including vaccine maker Moderna, investment manager Blackstone and semiconductor company Micron Technology.
JPMorgan also says it’s time to buy: The firm particularly likes energy-related stocks such as Exxon Mobil and Sunrun, while also predicting a rebound in some consumer and retail stocks—namely Uber, McDonald’s, Nike, Target and Estee Lauder.
With the S&P 500 down roughly 8% in 2022, markets have had one of their worst starts to a year in the post-Second World War era, according to a recent note from JPMorgan. The only other times in recent history that the benchmark index has done worse in the first few months of the year was during the 2008-2009 global financial crisis and the 2020 Covid pandemic.
“Recent market volatility has created buying opportunities,” Goldman analysts said in a recent note.
With inflation sitting at 40-year highs—up 7.9% from a year ago, the Federal Reserve on Wednesday raised interest rates for the first time since 2018, by a quarter-percentage point. Fed officials have been warning about the “highly uncertain” economic impact from Russia’s invasion of Ukraine, saying earlier this week that the higher energy prices as a result of the conflict will likely “create additional upward pressure on inflation and weigh on economic activity.” The central bank now predicts six more rate hikes this year and three more in 2023 (up from a previous forecast of three rate hikes each year).