How to Invest with Deflation on the Horizon

You’d have thought I was crazy if I’d said this a month ago… But, as it turns out, this is a great moment for growth stocks.

On my Growth Investor Buy List, our average stock surged 29.4% in the past month and beat the S&P 500 by 4.5%, to post the biggest monthly gain ever recorded in Growth Investor and the best month relative to the S&P 500 in the past 27 months!

This is why I’ve been telling anyone who will listen: Good stocks bounce right back. And that’s just what has happened.

But the larger point I’d like to make today is that, going forward, I anticipate it’ll be wise to hold fewer stocks. My reasoning is simple; the economic recovery is expected to be quite narrow.

The reality is we’re in a “U-shaped” recovery. States are reopening at different paces. Nations in Europe and Asia are opening on different timetables. But that’s just one reason.

Here’s another example from the healthcare industry.

You may have seen that United Healthcare (UNH) recently reported better-than-expected earnings on April 15. The truth of the matter is that most health insurance companies will. That’s because, during the coronavirus outbreaks, normal elective medical procedures (e.g., new hips, knees, stents, etc.) have been largely curtailed. This means fewer health insurance claims… which naturally pads the profits of health insurance companies.

The flip side of this coin is that the coronavirus is now severely hurting the profitability of most private hospitals and many doctors’ offices. Until the Centers for Disease Control & Prevention (CDC) lifts its restrictions, private healthcare companies will not be able to utilize all their fancy medical equipment and facilities, like MRI machines, hospitals and outpatient surgery centers, that are extremely costly.

When the April economic data is released, it is expected to be dire. However, Americans are naturally optimistic and eager to get back to normal – or the “new normal,” especially in New York City and other congested urban areas. Hopefully, the U.S. economy can resume growing and prospering under the new CDC guidelines.

Now Let’s Talk About Deflation

I remain impressed how the Federal Reserve remains in control of Treasury bond yields, which have recently continued to decline while the stock market has improved. Keep in mind: The lower the 10-year Treasury bond yield, the stronger the foundation under the stock market. Demand for both high-yield corporate bonds and high-dividend-yielding stocks remains robust, which is a good sign that investors are expecting economic growth to reaccelerate.

Frankly, though, I am worried that the current ultralow interest rate environment may remain permanent. With $18 per barrel crude oil, there is no doubt that deflation forces are spreading.

The world used to use approximately 100 million barrels of crude oil per day, but now with worldwide demand down approximately 30%, barely 70 million barrels of crude oil per day is demanded. As a result, the OPEC+ nations (which includes Mexico and Russia) cut production by 9.7 million barrels per day – but that is grossly insufficient. Even if Canada, the United States and other non-OPEC+ countries cut crude oil production by 10 million barrels per day, that is still grossly insufficient. So, the crude oil glut continues to grow.

Generally speaking, cheap oil – which becomes cheap fuel – has a lot of positives. But it can go too far when this near-zero input cost produces sharply lower prices. The problem is, other costs of doing business will not be lower for many companies. So, lower prices in the marketplace can be very rough for their profitability.

The bottom line is, if deflation becomes permanent, it could eventually become a threat to stock valuations. Fortunately, low commodity prices and ultra-low interest rates are currently boosting dividend stocks.

Dividend payers is just another corner of the market where you’ll have to be highly selective.

Some high-profile companies have suspended dividends in recent months, like Boeing (BA), Darden Restaurants (DRI) and Ford Motor Co. (F). Fortunately, as the first-quarter earnings season kicked off, Johnson & Johnson (JNJ) boosted its dividend, and then Costco (COST) subsequently raised its dividend.

Currently, the average stock in the S&P 500 yields 2.34% and all the dividend stocks in the S&P 500 yield 2.93%. So, based on a 10-year Treasury bond yield of 0.65%, the S&P 500 yields 3.6X,while the dividend stocks in the S&P 500 yields 4.5X the 10-year Treasury bond! That makes the stock market a screaming buy right now.

As I have been repeatedly saying here in Market360 (and in special podcasts for my newsletters like Growth Investor), the dividend stocks have been rallying impressively ever since the Fed seized control of Treasury bonds. Now that we are in the midst of the first-quarter earnings announcements, it is finally time for growth stocks to shine.

But why choose between growth and dividends?

My Top 3 Elite Dividend Payers for May in Growth Investor are the crème de la crème of dividend stocks.

In addition, three of my Top 5 High-Growth stocks in Growth Investor also offer dividends. Most importantly, though, they have superior growth prospects, so they’ve got the rare one-two punch of growth and income.

All five got top marks for their Quantitative Grade, which indicates strong institutional buying pressure: the single biggest factor in a stock’s long-term success. And all five have strong fundamentals, like sales growth, to boot. Two of my Top 5 stocks will be reporting their first-quarter results early next week, so now is the time to buy before their strong earnings reports drop kick them and drive them higher.

If you’d like to know my Top 5 Buys for Growth Investor – plus the three growth stocks I recently recommended selling into strength – then click here to try Growth Investor and receive tomorrow’s May Issue.

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