A tepid inflation report rattled Wall Street and dampened hopes for the number of tax cuts likely this year, but there are still areas in the market where investors can hide if price pressures continue to re-accelerate. Stocks sold off on Wednesday, with the Dow Jones Industrial Average tanking as much as 500 points at one point after March inflation data came in above economist forecasts. The 10-year Treasury yield, a benchmark for mortgage loans and credit card debt, soared back above 4.5%. To guard against stubborn inflation and higher long-term interest rates, investors should focus on quality companies with high pricing power and adjust their duration risk in bonds, according to Wall Street strategists and portfolio managers. Duration refers to a bond’s sensitivity to interest rate movements, and usually focuses on short versus medium versus long term maturities. Pricing Power Firms with high pricing power tend to outperform when inflation is elevated because they have the ability to defend their profit margins by passing on higher costs to their end-market customers. “In stocks, you should prefer companies that have pricing power, ie mostly mega-cap technology,” Brad Conger, CIO at Hirtle Callaghan & Co., an asset manager overseeing more than $18 billion, said in an email. Such companies, including those commonly called Big Tech, often have high profit margins and are expected to generate steady sales growth despite sticky inflation. Short-term bonds Bills and notes and bonds with shorter-dated maturities could become a safer alternative when rates rise because their value holds up better than longer-dated bonds in a period when inflation sometimes flares and the Fed keeps rates where they are. is to fight higher prices. “If markets worry about inflation persisting, bond yields are likely to move higher. In that case being short (or cash) is a good place to hide,” said Sonu Varghese, global macro strategist at Carson Group. The two-year Treasury yield, the most sensitive to monetary policy, jumped 20 basis points to 4.95% on Wednesday after the March inflation report. Tips and more A direct hedge against inflation in the fixed income market is Treasury Inflation Protected Securities. The principal of these securities rises and falls with the movement of the consumer price index, offsetting the effects of inflation. Issued by the US government, investors can buy TIPS on five-, 10- or 30-year terms, with twice-yearly payments based on the value of the assets, which is adjusted every six months along with inflation. Investors could also consider so-called “anywhere” fixed income strategies that have the latitude to actively shift duration exposure and step into yield opportunities in volatile markets, said Jason Pride, head of investment strategy and research at Glenmede Trust, an asset manager. manager overseeing $44 billion. “When inflation is the dominant risk in markets, correlations between stocks and traditional bonds tend to be high. As a result, the typical diversification benefits offered by broad bond exposure may be less than advertised,” Pride said in an email. Among the recently introduced, actively managed bond ETFs is BlackRock Flexible Income ETF (BINC), whose managers include Blackrock’s chief investment officer of global fixed income Rick Rieder. BlackRock’s iShares strategy team recently argued that investors should take advantage of spikes in bond yields while they can and reinvest their cash.