7 Best Ways to Play the Reflation Trade

The market is in the early stages of what appears to be a rotation into reflation-friendly stocks. Here are seven ways to play this shift.

Concept art of inflation
(Image credit: Getty Images)

There's inflation. There's deflation. And now, there's the reflation trade.

We all have a pretty good idea of what inflation is. When demand outstrips supply, prices rise. This is often, though not always, driven by Federal Reserve policy. But the essence is an excess of demand (or shortage of supply) that forces prices to rise.

Deflation is the opposite scenario when you have an abundance of supply and relatively sparse demand, prices fall. And naturally, we saw a lot of deflation in 2020. With people around the world stuck at home for most of the year because of COVID restrictions, large segments of the economy saw a major dearth of demand.

So, what's reflation?

Call it "normalization." It's a quick bout of inflation to bring prices back to their long-term trend. And as 2021 advances, we're going to see the economy get back to normal. With every passing day, a couple million more Americans get vaccinated, and the restrictions that have kept a lid on growth continue to get lifted. This will only accelerate as new COVID cases fall.

Meanwhile, we already have trillions of dollars in artificial demand in the system due to Fed stimulus, jobless benefits and a host of other federal spending projects with trillions more yet to be spent. Just this past week, the Senate passed a $1.9 trillion stimulus bill, and this is by no means the end of it.

So, we can expect our deflated economy to get reflated in a hurry.

2020 was a year that favored technology stocks, which are relatively insulated from swings in the economic cycle. And while reflation is not necessarily bad for tech (though it can be), the reflation trade is a lot better for economically sensitive value stocks and particularly for commodities, basic industries and financials. Many of our best stocks to buy for 2021 include companies that would benefit from a reflation scenario.

Reflation also means rising bond yields, which have already been one of the defining trends of 2021. But again, this is part of normalization. Bond yields are simply returning to pre-pandemic levels, which were already very low by historical comparisons. So, good reflation plays will be stocks and funds that tend to do well when rates are trending higher.

Today, we're going to take a look at the seven best ways to play the reflation trade over the coming months.


Data is as of March 7. Fund yields represent the trailing 12-month yield, which is a standard measure for equity funds, unless otherwise indicated. Stock dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

Charles Lewis Sizemore, CFA
Contributing Writer, Kiplinger.com

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas, where he specializes in dividend-focused portfolios and in building alternative allocations with minimal correlation to the stock market.