A Quant Shop Builds a Basket of Stocks That Track Inflation
Illustration by Elias Stein
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As inflation hit a 40-year high in May, the race to identify companies that could increase prices to keep pace with rising costs began in earnest. But analysts at London-based Quant Insight had another idea: Find stocks that actually move up as expectations for inflation rise.
QI develops baskets of stocks that track macro measures, using a machine-learning tool developed by Cambridge University computer scientists. For the inflation basket, the firm tracked over-the-counter swaps that reflect expectations for U.S. consumer prices over five years. The system arrived at criteria that picked stocks that, as a group, correlated with inflation expectations 83% of the time.
There are surprises. QI’s current basket of 40 stocks has fewer energy or real estate stocks than most inflation-related lists. Its heavier-weighted sectors are consumer discretionary, industrials, healthcare, and consumer staples.
QI’s inflation basket keeps any stock’s weight below 5% of the portfolio. Its weightiest holdings include mechanical-heart maker
Abiomed
,
FedEx
,
shipper
C.H. Robinson Worldwide
,
and toy maker
Hasbro
.
Energy isn’t unrepresented: There’s
Coterra Energy
,
and
Consumer staples show up in
Kraft Heinz
,
spice seller
McCormick
,
and cleaning-product seller
Lowe’s
and used-car dealer
CarMax
represent consumer discretionary.
Healthcare includes insurer
Humana
and women’s health specialist
Hologic
.
“Things are so macro-driven at the moment,” says QI’s CEO Mahmood Noorani. “Inflation is affecting everything.”
Monday 6/20
Equity and fixed-income markets are closed in observance of the Juneteenth national holiday.
Tuesday 6/21
Home builder
Lennar
reports second-quarter fiscal-2022 results.
Mastercard
,
and
MetLife
hold their annual shareholder meetings.
The Federal Reserve Bank of Chicago releases its National Activity Index for May. Consensus estimate is for a 0.41 reading, a bit lower than April’s 0.47. The index has had a positive reading every month since September of last year, which correlates with the economy expanding at a faster clip than its historical average.
The National Association of Realtors reports existing-home sales for May. Economists forecast a seasonally adjusted annual rate of 5.37 million homes sold, 240,000 fewer than in April. The April figure was the lowest since June of 2020, as record-high home prices, and the steepest 30-year fixed mortgage rates since 2008, have sharply curtailed home sales.
Wednesday 6/22
The Mortgage Bankers Association releases its weekly applications survey, a leading indicator of housing and mortgage financing activity, for the week ending on June 17. The index recently hit a 22-year low as refinancing demand plummeted as much as 75% year over year.
Thursday 6/23
FedEx
reports earnings after the market close. Shares of the global freight carrier surged 11.2% this past week after it announced a 53% dividend hike and added two independent directors to its board.
Darden Restaurants
,
and
FactSet Research Systems
hold conference calls to discuss quarterly results.
The Department of Labor reports initial jobless claims for the week ending on June 18. Claims have averaged 218,500 over the past four weeks, roughly equal to prepandemic levels after hitting a 54-year low in March. This, along with announced layoffs in the tech and housing sectors, suggest that a historically strong labor market is weakening.
S&P Global releases both its Manufacturing and Services Purchasing Managers’ Indexes for June. Expectations are for a 56.3 reading for the Manufacturing
PMI
and a 54 reading for the Services PMI. This compares with 57 and 53.4, respectively, in May.
Friday 6/24
CarMax
announces first-quarter fiscal-2023 earnings.
The Census Bureau reports new residential sales data for May. Consensus estimate is for sales of new single-family homes to hit a seasonally adjusted annual rate of 590,000, about even with the April figure. New-home sales, which make up about 10% of the housing market, are down more than 40% from the post-financial-crisis peak reached in August 2020.
Write to Bill Alpert at william.alpert@barrons.com
