Let’s stick with the inflation story.

How are those Federal Reserve “Dot Plots” looking?

If you recall, during the year, the Fed’s board members predict where they believe interest rates will be in the future.

Based on the Fed’s last meeting in December, board members expected interest rates to be below 4% in 2025.

Rates are currently 5.5%.

Inflation is 3%.

If inflation stays anywhere near that, there’s zero chance the Fed will cut rates to the extent the market expects.

And who knows, maybe no cuts at all. There’s no rule that says the Fed has to cut.

So what happens next? We’ll share a thought or two below…

Market Data

The S&P 500 closed up 1% to end the day at 5,000.62… the NASDAQ gained 1.3% to close at 15,859.15.

In commodities, West Texas Intermediate crude oil trades at $76.61, down $1.17…

Gold is $2,003 per troy ounce, down $2…

And bitcoin is $51,516, up $1,809 since yesterday.

Now, back to our story…

“Necessities” and “Habits”

As Bloomberg reports:

The Federal Reserve entered 2024 within spitting distance of its inflation goal. But that’s not quite close enough for policymakers.

The risk that inflation could remain stuck above their 2% target is guiding Fed officials’ preference to keep interest rates where they are now, even as investors have clamored for cuts.

Fresh inflation data released Tuesday underscored their reason for caution: Consumer prices excluding food and energy rose more than expected in January, a sign that businesses still have the ability to raise prices, especially in the services sector. If officials were looking for more evidence that pricing power has been wrung out of the economy, they didn’t get it in Tuesday’s inflation report.

You know things aren’t great when inflation is up more than expected, even excluding food and energy.

So what types of investments make the most sense? We’ll stick to stocks. That’s our beat.

In our view, for the longer-term (meaning holding for two or more years) investor, rather than trader we would suggest thinking of “necessities” and “habits” stocks.

In plain English, buying stocks that produce things consumers can’t do without… and things they won’t do without.

Let’s break that down.

“Necessities” are what most in the markets refer to as “consumer staples.”

Here you’re talking stocks like:

  • Proctor & Gamble (PG)

  • Costco (COST)

  • Walmart (WMT)

  • Mondelez International (MDLZ)

  • Kimberley-Clark Corp (KMB)

These are companies that either produce or sell things people need. Sure, Proctor & Gamble produces branded products… and sure, when money is tight for consumers, they may switch to “unbranded” alternatives…

But over the long term, they all have great growth histories, and they all pay dividends.

Now, be aware that while they’ve all grown strongly over the years, it doesn’t mean they aren’t volatile. When the economy is booming, even though their stock prices can go up, they’ll often lag “consumer discretionary” stocks.

That is, the stocks for companies that make products or offer services that aren’t necessary on a day-to-day basis. That can even include luxury items.

The other type of stock that fits well in this environment is what we would call “habit” stocks. Others may refer to them as “vice” stocks.

But here we’re looking perhaps at the less controversial side of “habits.” Yes, tobacco stocks tend to do well over the years. And stocks like Altria (MO) have great long-term price charts. Plus, it pays a 9.5% yield!

But “habit” stocks can include other sectors.

Take Cracker Barrel (CBRL). Over the past 24 years, it has grown 652%. That’s an average annual gain of 8.7%. It also pays a dividend of 7%.

Now, again, the price has been higher. The stock price got slammed during Covid but rebounded as things reopened. For the last two-and-a-half years it has been in a downtrend. It’s out of favor.

But could that change? Of eight analysts covering the stock on Wall Street, only two have it as a buy. Do the research. Maybe there’s a good reason not to buy now.

But we’d rather buy low and when only two analysts are on board rather than two years from now when it could be 20% or 40% higher.

Or Darden Restaurants (DRI). Darden owns Olive Garden, Longhorn Steakhouse, and The Capital Grille, among others.

It had the same torrid time during the Covid pandemic… it rebounded… and has mostly stayed higher. It, too, pays a dividend — around 3.2%. And unlike Cracker Barrel, 20 out of 31 analysts like the stock.

Maybe that’s a danger sign. Or maybe it’s not such a bad idea to consider a strongly trending stock along with a beaten-down play.

Regardless, there’s an idea or two in there. We’re not saying to stick all your cash in the “necessities” and “habits” sectors. But we are saying that when inflation is still running hot, consumers find it hard to change their spending habits.

That makes stocks like these a logical consideration as the market continues along this high inflation and high interest rate environment.

More Markets

Today’s top gaining ETFs…

  • Amplify Transformational Data Sharing ETF (BLOK) +6.6%

  • Siren Nasdaq NexGen Economy ETF (BLCN) +6.3%

  • SPDR Kensho Clean Power ETF (CNRG) +4%

  • Invesco Dorsey Wright Technology Momentum ETF (PTF) +3.2%

  • Invesco Semiconductors ETF (PSI) +3.1%

Today’s biggest losing ETFs…

  • Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) -1.3%

  • VanEck Inflation Allocation ETF (RAAX) -1.2%

  • abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD) -1.1%

  • Core Alternative ETF (CCOR) -1%

  • USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI) -1%



Kris Sayce
Editor, The Daily Cut