Although the present focus in the equities sector concerns multidecade highs in inflation, it’s possible that countervailing actions could impart the opposite trajectory, deflation. The latter cycle is arguably far more vicious than the former, requiring a specific set of stocks to buy to survive the onslaught. Thus, forward-looking investors should consider the two relevant companies: Archer Daniels Midland (NYSE:ADM) and Sempra Energy (NYSE:SRE).
In late August of this year, Federal Reserve chair Jerome Powell delivered his monetary policy speech at the annual economic symposium at Jackson Hole, Wyoming. Primarily, the theme centered on absorbing some pain now to avoid devastating consequences later. Therefore, he signaled the intent to raise the benchmark interest rate, continuing to reaffirm his position in subsequent statements.
However, the latest data from the consumer price index revealed that while inflation in August declined relative to July, the metric still came in hotter than expected. With elevated consumer prices representing an ongoing headwind, by logical deduction, the Fed must get even more aggressive with its monetary tightening policies. Naturally, this dynamic implies a deflationary force to counteract inflationary pressures.
Nevertheless, should the central bank move too aggressively in combating surging consumer prices, it might inadvertently engineer a rough landing for the economy. In turn, such a circumstance would imply longer-lasting deflation.
The problem here is the incentivization profile. Under an inflationary cycle, investors work with an active catalyst – the threat of currency erosion over time. Therefore, people have every reason to put their money to work rather than sitting in cash.
On the flip side, deflation implies currency valuation expansion over time. Here, doing nothing guarantees a positive return. Therefore, an investment opportunity must be so compelling that it’s worth setting aside risk-free upside for the target prospect.
Very few stocks to buy are so compelling. However, these two ideas may fit the bill.
Archer Daniels Midland
At a very basic level, food processing and commodities trading firm Archer Daniels Midland commands a permanently relevant profile. According to Scientific American, the human body can go without sustenance for 10 to 14 days. Depending on hydration levels, this range can be anywhere from one to three weeks.
On a similar cynical note, Russia’s invasion of Ukraine drove significantly more relevance toward an already pertinent business in Archer Daniels. With the two warring countries representing key providers of food-related commodities, the disruption to vital supply chains drove prices higher. However, because nutritional intake represents a non-negotiable need, ADM can weather myriad storms, making it one of the stocks to buy to overcome deflation.
While the focus currently centers on higher-than-normal consumer prices, deflation is likely coming. Recently, the Fed raised the benchmark interest rate by 0.75%, and the central bank stated that more hikes will come if inflation does not get under control. Unfortunately, this dynamic strongly implies a slower economy, which in turn means higher unemployment.
While that has many folks on Wall Street worried, ADM should perform well over the long run. In fact, when the market melted down during the September 21 session, ADM only lost 0.81% for the day. Effectively, no matter what happens, consumers must put away enough money in their budget for their basic needs. Therefore, Archer Daniels is almost a no-brainer among stocks to buy.
Is ADM a Good Stock to Buy?
Turning to Wall Street, ADM stock has a Strong Buy consensus rating based on three Buys, one Hold, and zero Sells assigned in the past three months. The average ADM price target is $102, implying 18.6% upside potential.
While not representing as much of any existential demand incentivization profile as Archer Daniels Midland, utility giant Sempra Energy nevertheless represents one of the best stocks to buy to fight a potential deflationary storm. Essentially, baseline demand for Sempra and its ilk is relatively inelastic.
To clarify, higher utility bills certainly motivate service users to mitigate their behaviors. For instance, many folks may opt to use less-energy-consuming fans over energy-intensive air conditioners during a heat wave. However, in this digitalized world, it’s impossible not to consume a basic threshold of electricity to power our computers, smartphones, and other devices. Therefore, this demand profile remains largely the same, irrespective of various economic pressures.
Moreover, even if the Fed causes a rough landing for the economy that leads to wider job losses, impacted consumers will still earmark their (diminished) budget to maintain critical utility services. That’s because the very act of looking for a job – using a computer to seek out opportunities and apply for them – requires electricity. Thus, SRE makes for an intriguing case among stocks to buy.
Finally, Sempra’s geographic location – mainly covering the Southern California region – represents a major advantage. Per Statista.com, California’s GDP is about $3.36 trillion. This tally makes it the undisputed economic engine of the U.S., meaning Golden State residents are able to absorb various economic headwinds.
Is Sempra Energy a Good Stock?
Turning to Wall Street, SRE stock has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sells assigned in the past three months. The average SRE price target is $176.88, implying 7.2% upside potential.
Takeaway: Focus on Essential Stocks Like ADM and SRE
Truth be told, while the fundamental framework suggests that investors should watch out for deflationary pressures, no one knows for certain what the future holds. Given this vagary, it’s vital that market participants consider certain resilient ideas that can effectively negotiate multiple pain points. Both ADM and SRE feature demand profiles that cater to indelible needs, meaning that both qualify as stocks to buy.