The reflation trade is a bet that certain sectors of the market perform well immediately after a recession or economic crisis. Essentially, it’s a bet on cyclical stocks at the beginning of a market recovery.
Reflation is the inflation that typically comes immediately after a low-point in the economic cycle — often after economic stimulus, and the reflation trade is the purchase of specific stocks or sectors believed to outperform in that type of environment.
Reflation vs Inflation
While both reflation and inflation are characterized by rising prices, they are not the same thing.
Reflation is a recovery of prices lost during an economic downturn along with employment growth, and many economists see reflation as a healthy sign of an improving economy. It often accompanies economic stimulus, and may reflect monetary policy designed to stimulate spending and halt deflation.
Inflation, on the other hand, does not look at employment or any other economic factors. It is the rise in prices beyond their “normal” range, and poses a threat to economic recovery, since it can reduce the purchasing power of consumers and make it more expensive to borrow money.
Reflation is also different from what happens during stagflation, in which prices go up but wages don’t follow.
💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
Understanding Reflation Trade Opportunities
Reflation doesn’t just mean that the market as a whole will rise as economic activity returns to normal or even higher levels. Instead there’s a focus on certain sectors as they reflate after a decline.
For example, some investors might see reflationary dynamics in sectors like hospitality or dining during a pandemic, along with travel and tourism. It may also be noticeable, under those circumstances, in more indirectly affected sectors like energy and materials.
Again, assuming an economy suffers a pandemic, part of the reflation trade could be a switch from purchases of goods to services, as people go out more, whether it’s movie theaters, restaurant meals, theme parks and hotels. These are the sectors that would perform well if the reflation thesis turned out to be true.
Investors interested in the reflation trade can invest in individual stocks, or get more diversified exposure by investing in sector-specific exchange-traded funds (ETFs) or index funds.
Get up to $1,000 in stock when you fund a new account.**
Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.
**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Reflation Trade Sectors
While hospitality stocks might make sense for investors considering a reflation trade, there are other sectors that typically perform well in most deflationary environments. Here’s a look at a few of them:
Financial Stocks
Banks and other financial institutions tend to do well after an economic recession, since they can benefit from both higher interest rates and ramped up consumer spending.
Value Investing
Companies that deliver steady, long-term growth often get undervalued during economic downtimes, meaning that they’re poised for better performance as the market begins to improve. That’s the logic behind value investing.
Bonds
When interest rates are rising–in either the short- or the long-term — investing in bonds may benefit from a reflationary market.
Commodities
Since commodities tend to perform well during both periods of inflation and periods of economic growth, they’re a favored investment among those looking for a reflationary trade. As such, commodities trading could be an attractive area in a reflationary market.
Small Cap Stocks
Investments in small cap stocks tend to increase in value after recessions or during periods of growth, making them another asset that investors might consider in a reflationary market.
💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
The Takeaway
The reflationary trade is a bet on specific sectors of the economy or certain types of asset classes in the aftermath of an economic downturn. If you’re interested in incorporating the reflation trade into your portfolio, you could do so either via individual stocks or by buying sector-specific exchange-traded funds (ETFs) or mutual funds.
But note that the economy is a complicated thing, and that there are cycles it naturally takes, but it’s also susceptible to all sorts of other events. That includes natural disasters, political changes, or even pandemics and other global crises. With that in mind, it can be difficult to be sure of what sort of environment the economy is in, exactly, at any given time.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
Photo credit: iStock/eugenesergeev
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0723019
Source: sofi.com