Dow futures plummeted more than 900 points in overnight trading on November 8 as Donald Trump took key swing states and looked ready to seal the election. However, a switch went off before official trading started on the 9th. The uncertainty around a Trump presidency has turned to optimism on hopes for up to $1 trillion in fiscal stimulus.

#-ad_banner-#Market expectations have led the S&P 500 3.2% higher since the election but investors in a few sectors have not enjoyed the rally. 

The rate on the 10-year Treasury has jumped 21% to its highest point since the beginning of the year. That rise in rates has caused rate-sensitive sectors like utilities and consumer staples to plunge as investors find better yield in bonds. 

The Utilities Select Sector SPDR ETF (NYSE: XLU) is down 2.3% and the Consumer Staples Select Sector SPDR ETF (NYSE: XLP) is 2.5% lower since the election.

But more than seven years into the bull market, investors can’t afford to neglect stocks that can protect their portfolio when market volatility heats up. Stocks may already be priced to perfection and the slightest hit to confidence in the economy could send the market tumbling.

Protecting your portfolio may depend on finding the few safety stocks that can survive as interest rates move higher.

Safety Stocks Melt As The Bond Bubble Bursts
The pain in the two traditionally safe sectors may not be over. Plans for fiscal stimulus and inflation expectations have taken market odds of a Fed rate hike in December to nearly 100% and Chair Yellen told Congress recently that policy tightening could be “appropriate relatively soon,” citing dangers in waiting too long. 

Investors are worried that government infrastructure spending and other economic policies could spark inflation as well as growth. Unemployment is already low at 4.9% and increased hiring may push wage inflation up fast. Not only would the Fed need to increase rates to control inflation, but it would need to raise borrowing costs as a counterweight to keep the economy from overheating.

Rising rates mean problems for safety stocks on multiple levels. The higher rates available on bonds means investors don’t have to reach for yield, a driver that has led to massive inflows into utilities and consumer staples over the last several years. 

Higher borrowing costs also mean higher interest expense. Companies in the sectors typically carry much higher debt on relatively stable cash flows. Sudden rate shocks may catch management off guard and reduce earnings.

Finding Safety In Safety Stocks
Beyond the market selloff in bonds, there is reason to believe that inflation and rates may not rise as fast as market fears suggest. Even on the increase, inflation expectations for the next year have only moved up to 1.9%, which is still relatively low. The personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure, has been below the 2% target for years. 

While investor sentiment and the potential for higher rates may still weigh on the broader utilities and consumer staples sectors, there are names that could provide upside surprises. These companies have stable cash flow growth and strong pricing power in the face of rising rates.

Regulated utilities could outperform their unregulated peers because they can pass costs through to consumers on rate increase approvals while unregulated utilities must sell on the open market. I’m also watching the ‘sin’ stocks like cigarettes and alcoholic beverages which can answer inflation quickly with higher prices.

Philip Morris International (NYSE: PM) has plunged 8% since the election but has some of the most stable cash flows in the market. The company holds 28% of the global tobacco market share, excluding China and the U.S., and owns seven of the leading 15 international brands. The firm generates $6.7 billion in free cash flow annually and pays a 4.75% dividend yield.

The company was able to raise prices by 5% in 2015 and drive an 18% increase in earnings on constant-currency terms. The global diversification across developed and emerging markets helps to protect cash flows against changes to taxes and regulation in any one country.

Procter & Gamble Company (NYSE: PG) has tumbled 5% since the election, bringing shares to 22.3 times trailing earnings and a 16% discount to the industry average. While it’s not a ‘sin’ stock, P&G has recently finished shedding more than half of its brand portfolio and the 65 remaining brands are some of the strongest in consumer staples. Twenty-one of those brands book more than $1 billion in annual sales each and the company generated $11.5 billion in free cash flow last year.

P&G has returned an average $12.66 billion to investors annually over the last three years for 5.8% total yield. Earnings are expected 6.7% higher over the next four quarters to $3.97 and the potential to send shares past $90 each.

PPL Corporation (NYSE: PPL) dropped 5.6% after the election before recovering, but is still down 14% from the June high before the Brexit vote. PPL is a regulated distributor of electricity in Pennsylvania and Kentucky, as well as customers in the United Kingdom. Despite the post-Brexit selloff, electricity demand should not be materially affected and upcoming quarters could calm investor fears. 

Shares trade for 12.2 times trailing earnings for an 11% discount to the industry average and pay a 4.7% dividend yield. The Bank of England cut rates to a record low of 0.25% in August and introduced stimulus to counter any economic effects of Brexit. This should mean cheap borrowing costs and continued electricity demand for the company’s international segment.

Even if stimulus on new fiscal policies comes with higher inflation and interest rates, these three names should be relatively safe and even provide upside. If inflation and rate expectations fail to materialize, these three best-of-breed stocks could surge along with their sectors.

Risks To Consider: Investor sentiment may weigh on the broader sectors, holding back gains in even the best-of-breed names.

Action To Take: Take advantage of the recent selloff in utilities and consumer staples to buy best of breed names like Philip Morris International, Procter & Gamble and the PPL Corporation.

Editor’s Note: What better way to get on the “millionaire track” than investing in companies owned by millionaires who also happen to write the law. In this special presentation you’ll get the names and tickers of several of Congress’ favorite stocks. Details here.