Where to Invest Right Now Amid Rising Inflation and Recession Fears

U.S. inflation rose at an annualized pace of 8.6 percent in May, which is a new high since 1981. The worse-than-expected inflation combined with a reasonably strong job market would mean that the Federal Reserve might raise rates aggressively. However, recession and stagflation fears are also rising amid slowing growth and rising rates. Where should you invest right now amid red hot inflation?

Rising inflation has a negative impact on companies. Retail companies are witnessing a slowdown in sales of discretionary items while companies like Meta Platforms are battling lower global ad spending.

First, it's important to look at the investments that you should avoid. Among stocks, you can give a miss to loss-making growth companies, especially the ones that have been listed over the last year.

If you're looking at investing in debt, you can avoid junk bonds. In general, bonds aren't looking like a good investment. Bond prices will likely fall more as bond yields rise. Among commodities, some industrial metals like nickel and silver could see selling pressure.

Penny stocks can also be best avoided amid the economic turmoil. Talking of specific sectors, consumer discretionary stocks might feel the heat as consumers spend less on discretionary goods.

If you're looking at a safe debt investment for the long term, where you can at least beat inflation, I Bonds can come to your rescue. The current yields on I Bonds are approaching double digits. While they will come down with the fall in inflation, you will be able to earn more than inflation since the interest is tied to the urban CPI.

Suze Orman is among those who believe that I Bonds are perhaps the best investment option right now considering the sticky inflation.

If you're a risk-averse investor, you can look at defensive stocks. Pharma stocks can be a good bet since these companies don’t see much impact on their business from the economic slowdown. Also, some of the pharma stocks pay good dividends as well.

Jefferies thinks that companies like Altria, Gilead Sciences, Hormel Foods, Edison International, and Johnson & Johnson are the defensive stocks that investors can buy amid the stagflation fears.

In general, stick with mature and profitable companies that can survive the economic turmoil. Companies with pricing power also tend to do well in an inflationary environment.

Energy stocks are outperforming the markets by a wide margin in 2022. Warren Buffett, who's known for his value investments and focuses on long-term investing, has loaded up on energy stocks in 2022. In the energy space, you can either look at oil and gas stocks or you might also look at ETFs that invest in these companies. Higher energy prices look here to stay for some time considering the Russia-Ukraine war.

The stars are quite mixed for gold. Multi-decade high inflation, geopolitical turmoil, and slowing growth are bullish drivers for oil. However, the Fed’s rate hikes are negative for gold since it’s a non-interest-bearing asset. Amid the current macro environment, it would be prudent to allocate some funds towards gold as well.

Finally, “cash is not trash” under the current scenario. You can maintain a high cash allocation and use the money tactically to buy stocks as markets fall. While you can't time markets, you can stagger your purchases and do dollar-cost averaging.