The May CPI print of 5.0% was the highest since August 2008. However, this figure isn’t expected to alter the Fed’s timeline for tightening monetary policy. According to futures markets, the Fed isn’t expected to hike interest rates until the middle of 2023 which implies that tapering of asset purchases won’t begin until the middle of 2022.
Of course, this outlook only makes sense if inflation is transitory. Many are skeptical and believe that we are in a new inflation regime due to the combination of the Fed’s low rates and aggressive fiscal policy. So far, the market seems to believe that inflation is transitory as several market-based measures of inflation have dropped over the past few weeks despite headline inflation numbers coming in strong. This is evident from the Fed Funds futures markets, TIPS, and the decline in Treasury yields.
If the market consensus is correct, and inflation readings are about to turn lower, then investors should adjust their strategies accordingly. 4 ETFs that could outperform in an environment of decelerating inflation are the Invesco Dynamic Leisure and Entertainment ETF (PEJ), US Global Jets ETF (JETS), Invesco QQQ Trust (QQQ), and the SPDR S&P Dividend ETF (SDY).
Invesco Dynamic Leisure and Entertainment ETF (PEJ)
PEJ is composed of restaurants, theme parks, and hotels, so it’s been an outperformer since November 2020, when the vaccine was announced. Stocks in these sectors should continue to do well as the world returns to normal with particularly high pent-up demand for traveling, gambling, and eating out.
However, a looming challenge for these companies will be to rehire workers as many workers left for different industries, while older workers may have retired. As it is, these companies have a higher share of labor costs than many industries, and hiring more workers is necessary for them to operate at full capacity. Like most inputs, labor costs are higher at the moment especially as many workers are choosing to stay at home.
However, this could change in the coming months as inflation pressures are relieved especially if more workers enter the labor force. This would be particularly beneficial for the companies in PEJ.
The POWR Ratings are also high on PEJ as it is rated a Strong Buy. The POWR Ratings also evaluates stocks by various components and PEJ shines here as well as it has As across all categories. To see how PEJ ranks among consumer-focused ETFs, click here.
US Global Jets ETF (JETS)
The pandemic and ensuring recovery have thrown off all sorts of historical inter-market relationships. For example, oil prices and airline stocks typically have an inverse relationship as fuel costs generally account for 25% of an airliner’s total costs. So, it’s certainly unusual that airlines and oil prices have been moving higher in tandem over the past few months.
It makes sense considering that both are being driven by the world returning gradually to normal which means oil demand and demand for air travel will return to pre-covid levels. However, if the inflationistas are correct, and oil prices are going to keep moving higher, then at some point this would start to erode the profit margins of airliners. Even now, higher fuel prices are starting to impact margins but this is more than offset by revenue sharply increasing.
Therefore, if the market and Fed are correct in labeling inflation as transitory, then it will benefit JETS as air travel demand will continue strengthening, while oil prices will back off. This would certainly be a powerful bullish catalyst for JETS.
The POWR Ratings are constructive on JETS as it is rated a B which translates to a Strong Buy. JETS also has a B for Buy & Hold Grade which isn’t surprising considering that travel is expected to be quite strong over the next couple of years due to pent-up demand for travel.
Note that JETS is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Invesco QQQ Trust (QQQ)
During the first few months following the stock market bottom in March 2020, QQQ was the strongest index for a variety of reasons. While most companies saw a drop in revenues, many tech companies’ revenue increased as companies were forced to go remote and increase spending on tech to make the transition.
Another positive tailwind for QQQ was its heavier concentration of growth stocks. Thus, the steep drop in interest rates boosted QQQ, but it became a headwind during the last few months of rising rates. Rates started to rise as economic growth and inflation expectations increased as the worst of the coronavirus seems to be behind us.
If inflation started to back off, rates would likely move lower as well. Thus, growth stocks could once again, outperform. Further, many of the largest stocks in the QQQ such as Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL) continued to post strong earnings reports over the last couple of quarters even though tech has been an underperformer.
This could be setting up a nice buying opportunity with a deceleration in inflation, serving as a catalyst. The POWR Ratings are also bullish on QQQ as it’s rated an A which translates to a Strong Buy. Within the Large Cap ETF group, QQQ is ranked #1 out of 54. To see more of QQQ’s POWR Ratings, click here.
SPDR S&P Dividend ETF (SDY).
Dividend stocks tend to outperform during periods of falling rates. And, rates are more likely to decline when inflation is decelerating.
Currently, the 10-year Treasury yield is at 1.46%, while SDY’s dividend yield is 2.6%. This spread will widen as the 10Y yield would likely decline if inflation readings start to decline.
SDY is composed of many high-quality stocks with a consistent track record of paying and raising dividends such as Chevron (CVX), Exxon Mobil (XOM), and AbbVie (ABBV).
It’s not surprising that SDY has an A rating which translates to a Strong Buy given this potential catalyst and SDY’s collection of holdings. SDY also has an A for Trade Grade which is consistent with its strong performance over multiple timeframes. To see more of SDY’s POWR Ratings, click here.
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QQQ shares rose $0.66 (+0.19%) in premarket trading Monday. Year-to-date, QQQ has gained 9.19%, versus a 13.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.
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