How to hedge against inflation — and what to avoid

Inflation is all that the market seems to care about these days. Wages are rising, consumer prices are surging — and investors are worried the Federal Reserve will raise interest rates faster than expected to keep inflation in check.

So what’s an investor to do? The S&P 500 is down more than 2% in the past week and the Nasdaq has fallen more than 4%, even with stocks rebounding Thursday. The CNN Business Fear & Greed Index, which measures overall market sentiment, also slid into Fear territory Wednesday.

Experts say there are a few options for investors looking to hedge against rising prices.

The classic choice is gold, which is often viewed as a means for investors to protect their portfolios from inflation. Indeed, gold hasn’t fallen nearly as much as stocks this week. That could be a sign that gold will continue to hold up better than the rest of the market if inflation continues to be an issue -— which some experts believe will be the case.

“I don’t think this is transitory,” said Michelle Connell, owner of Portia Capital Management, referring to the term Fed chair Jerome Powell has used repeatedly when talking about how rising inflation will be a temporary phenomenon. “The Fed is probably going to have to raise rates sooner rather than later.”

And if that happens, Connell thinks investors would be wise to look at bank stocks, which stand to generate more interest income as loan rates go up, as well as sectors of the real estate market.

“Financials have more upside and some parts of real estate still look good,” she said, noting that real estate investment trusts (REITs) that own apartment buildings, data storage centers and cell phone towers can do well even if rates go up — since more people may look to rent as opposed to buy, and the federal government is set to spend more on infrastructure.

Stock slide presents an opportunity to buy the dip

But there are pockets of the stock market that may have been oversold in the past week due to inflation jitters.

“The US still has a housing shortage. Homebuilders are pulling back now, but could offer buying opportunities in the next few months,” David Russell, vice president of market intelligence at TradeStation Group, said in a blog post.

Russell added that the sell-off in top tech stocks like Apple and Facebook may be overdone, given that both companies are still market leaders that should post big increases in earnings and revenue no matter what happens on the inflation front.

Experts also said investors should start to buy in sectors of the stock market that have been laggards during the past few years.

“If you are worried about inflation, think internationally,” said Roger Hewins, president of wealth management firm Team Hewins. He said emerging market stocks that have trailed the broader market might hold up better than US stocks.

Be wary of bitcoin and bonds

Some crypto bulls are evangelizing about how bitcoin and other cryptocurrencies are like a new, digital gold. Bitcoin could be a good hedge, they contend, because unlike other major currencies, it is not backed by a central government.

But the trouble with that argument is that what’s happening in crypto land often seems very far removed from the real economy in the first place.

Bitcoin and other digital currencies plunged Thursday after Elon Musk did an about-face on letting Tesla customers use bitcoin to buy its electric vehicles.

Bonds may not offer much protection either. Concerns about rising longer-term bond yields — even if the Federal Reserve leaves short-term rates near zero — threaten to wreak havoc on fixed income assets.

“It’s time for investors to start thinking about how to diversify their portfolios in case there is sustained inflation,” said Nancy Davis, founder of Quadratic Capital Management and manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF, in an email.

“Fixed income investors should be keeping a close eye on inflation,” she added. “If bond yields rise… bond holders could see price drops in parts of their portfolios that they thought were safe.”