The Dollar Lost 7.5% Of Its Value Last Year, But These Stocks Are Benefiting

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Inflation in the U.S. is becoming a major concern. The consumer price index (CPI) published by the Bureau of Labor Statistics rose 7.5% in January 2021, ahead of Wall Street estimates, marking the largest year-on-year increase in over 40 years. The inflation rate accelerated from levels of around 7% in December. The rise in consumer prices is led by rising costs for housing, energy, and food. The core CPI, which excludes energy and food, jumped 6% on a year-on-year basis, compared to around 5.5% in December. The surge in inflation is making a case for sooner and potentially more substantial interest rate increases, with a 0.5% rate hike looking quite likely as soon as next month. The stock markets haven’t been reacting too well to this news of inflation and rate hikes, with the S&P 500 declining almost 2% on Friday and the highly interest-rate sensitive Nasdaq-100 index falling by almost 3%.

However, our theme of Inflation Stockswhich includes companies from the banking, insurance, consumer staples, and energy sector that stand to benefit from high inflation – has outperformed in 2022, rising by about 9% year-to-date, compared to the S&P 500, which remains down by about 7% year-to-date. We think this theme could continue to outperform in the near term as well, for a couple of reasons. Firstly, rising rates should bode well for the banking and insurance stocks in the theme, potentially leading to stronger interest income. Moreover, the stocks in the theme are also mostly value picks from real economy sectors, which should benefit as investors reduce exposure to growth stocks. For example, the average price to sales ratio of the stocks in our theme stands at just about 2.5x.

Within our theme, Exxon Mobil stock (NYSE: XOM) has been the strongest performer, rising by 26% year-to-date in 2022. On the other side, Procter & Gamble stock (NYSE: PG) has been the weakest performer, with its stock down by about 4% thus far in 2022.

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Below you’ll find our previous coverage of the inflation stocks theme where you can track our view over time.

[2/1/2022] Stocks That Benefit From Surging Inflation And The Coming Rate Hikes

Our theme of Inflation Stockswhich includes companies from the banking, insurance, consumer staples, and energy sector that could be more likely to benefit from high inflation – has outperformed meaningfully this year, rising by about 7% year-to-date, compared to the S&P 500, which is down by about 7%.

So will the outperformance continue? Inflation in the U.S. has been surging, with the consumer price index (CPI) published by the Bureau of Labor Statistics rising 7% in December 2021, the largest 12-month increase since June 1982. However, we think it’s likely that inflation rates will cool off this year for a couple of reasons. Firstly, the Federal Reserve is also looking at multiple interest rate hikes, the first of which is expected around March 2022. This could hurt demand growth to an extent. Moreover, the supply chain issues which were a major factor driving inflation through 2021 could also ease as the Covid-19 pandemic wanes, resulting in more moderate prices increases. That said, we think that the stocks in our theme should fare better than the broader market, given that they are mostly value picks from real economy sectors, which could find favor with investors as yields rise. For perspective, the average price to sales ratio of the stocks in our theme stands at just about 2.5x.

Within our theme, Exxon Mobil stock (NYSE: XOM) has been the strongest performer, rising by 23% year-to-date in 2022. On the other side, Procter & Gamble stock (NYSE: PG) has been the weakest performer, with its stock down by about 2% thus far in 2022.

Below you’ll find our previous coverage of the inflation stocks theme where you can track our view over time.

[1/14/2022] Stocks That Benefit From Surging Inflation And The Coming Rate Hikes

Inflation in the United States continues to surge with the consumer price index (CPI) published by the Bureau of Labor Statistics rising 7% in December 2021, the largest 12-month increase since June 1982. The inflation metric also rose 0.5% from November levels. The increase was driven by higher prices for housing, used vehicles, and food, although energy prices moderated a bit in December after seeing a big increase through much of 2021. The core CPI, which excludes energy and food, jumped 5.5% on a year-on-year basis, marking the highest levels since 1991.

Prices have generally been trending higher due to the supply side disruptions and bottlenecks caused by the pandemic, shortages in the labor market, and also by unprecedented demand for goods and services following the easing of lockdowns. Now the recent surge in daily U.S. Covid-19 infections to about 760,000 over the last week, driven by the spread of the highly infectious omicron virus variant, could further disrupt supply, continuing to put pressure on inflation. That being said, it’s now a given that the Federal Reserve will follow through on its plans of multiple interest rate increases this year, with the first hike likely seen in March.

While stocks, in general, fare better than bonds during periods of high inflation, our theme of Inflation Stocks includes companies from the banking, insurance, consumer staples, and energy sector that could be more likely to benefit from high inflation and possibly higher interest rates. The theme has returned a solid 6% thus far over 2022, compared to the S&P 500 which remains down by about -2%. Over 2021, the theme returned about 21%, underperforming the S&P 500 which was up by about 27%. Within our theme, Exxon Mobil (NYSE:XOM) has been the strongest performer, rising by 49% over the last 12 months. On the other side, Citigroup (C) has been the weakest performer, with its stock remaining roughly flat over the last 12 months.

Below you’ll find our previous coverage of the inflation stocks theme where you can track our view over time.

[11/15/2021] Exxon, U.S. Bank: Stocks To Watch As Inflation Surges To 30-Year Highs

The inflation rate in the U.S. continues to surge, with the consumer price index (CPI) published by the Bureau of Labor Statistics last week rising by 6.2% in October compared to a year ago. This marks the fastest annual increase in over 30 years and a surge from levels of 5.4% in September. There are a couple of factors driving rising inflation, including higher energy and food prices, strong demand and supply chain issues following the Covid-19 opening, and a severe shortage of workers, which is driving wages higher. The core CPI, which excludes energy and food, also jumped 4.6% on a year-on-year basis, marking the highest levels since August 1991. With inflation rates actually trending higher in recent months, there are concerns that inflation may not be transitory as previously expected.

While stocks, in general, fare better than bonds during periods of high inflation, our theme of Inflation Stocks includes companies from the banking, insurance, consumer staples, and energy sector that could be more likely to benefit from high inflation. The theme has returned about 25% year-to-date, roughly in line with the S&P 500. Within our theme, Exxon Mobil (XOM) has been the strongest performer, rising by 55% year-to-date. U.S. Bank (USB) stock has also done well, rising by about 30% this year so far. On the other side, Procter & Gamble (PG) has been the weakest performer, with its stock rising by just about 5% year-to-date.

[8/30/2021] Stocks To Pick As U.S. Inflation Soars To Near 30-Year Highs

Inflation in the U.S. continues to trend higher, with the Fed’s preferred measure of inflation, the price index for American consumer spending (PCE index), rising at a rate of 4.2% in the year ended July, its highest level in almost 30 years. Moreover, core prices, which exclude volatile items such as food and energy, were up 3.6%.  The numbers come on the back of surging demand for goods and services which have outpaced the ability of supply chains to keep up following Covid-19 lockdowns. Although the central bank is optimistic that inflation will recede, noting that it was likely to reduce its $120 billion in monthly asset purchases this year, the number is well above the 2% inflation level that the Fed is targeting.

That being said, we think that inflation could still remain slightly higher versus historical levels for some time. For example, personal savings have surged through the pandemic and the continuation of the low-interest rate environment over the next two years could also translate into higher pricing for goods and services. Our theme on Inflation Stocks includes companies from the banking, insurance, consumer staples, and energy sector that could remain stable or potentially even gain from high inflation. The theme has returned about 15% year-to-date, compared to the S&P 500 which is up by about 18%. Within our theme, Exxon Mobil (XOM) has been the strongest performer, rising by 28% year-to-date. Chubb (CB) stock has also done well, rising by about 20% this year so far. On the other side, Procter & Gamble (PG) has been the weakest performer, with its stock rising by just about 4% year-to-date.

[7/16/2021] How Equity Investors Can Profit From Surging U.S. Inflation

U.S. inflation figures for the month of June accelerated to the fastest pace since 2008, as the economic recovery following the Covid-19 related lockdowns continues to gather pace. Per the Labor Department, the consumer-price index rose 5.4% from a year ago, while the core price index, which excludes food and energy, rose by 4.5% versus last year. The price increases have been driven by surging demand for goods and services which have outpaced the ability of companies to keep up.  Although supply-side bottlenecks should be ironed out in the coming quarters, factors such as significant stimulus funding, a surge in the U.S. personal savings rate and a continuation of the low-interest rate environment over the next two years could mean inflation is likely to remain at elevated levels in the near future.

So how should equity investors play the current inflationary environment? Our theme on Inflation Stocks  includes companies from the banking, insurance, consumer staples, and energy sector that could remain stable or potentially even gain from high inflation. The theme has returned about 16% year-to-date, roughly in line with the S&P 500. However, it has underperformed since the end of 2019, remaining roughly flat, compared to the S&P 500 which is up by about 35%. Oil and gas major Exxon Mobil (XOM) has been the strongest performer in our theme, rising by about 43% year-to-date. On the other side, Procter & Gamble (PG) has underperformed, with its stock remaining roughly flat.

[6/17/2021] Stocks To Play Rising Inflation 

U.S. inflation has been trending higher, as abundant liquidity, soaring demand following Covid-19 lockdowns, and supply-side constraints are putting pressure on prices. On Wednesday, the Federal Reserve considerably raised its expectations for inflation for 2021, projecting that prices for personal consumption expenditures – its preferred inflation measure – could rise 3.4% this year, a full percentage point ahead of its March projection of 2.4%. The central bank didn’t make any changes to its aggressive bond-buying program and also indicated that interest rates will continue to remain near 0%, although it signaled two rate hikes in 2023.

So how should equity investors play the current inflationary environment and the prospect of higher interest rates? Our theme on Inflation Stocks includes stocks from the banking, insurance, consumer staples, and energy sector that could remain stable or potentially even gain from higher inflation rates. The theme has outperformed, returning about 17% year-to-date, compared to a return of just about 13% on the S&P 500. However, it has underperformed since the end of 2019, remaining roughly flat, compared to the S&P 500 which is up by about 31%. Oil and gas major Exxon Mobil (XOM) has been the strongest performer in our theme, rising by about 56% year-to-date. On the other side, Procter & Gamble (PG) has underperformed significantly, with its stock down by about 5% this year.

[5/27/2021] Rising Inflation Theme 

Inflation has been trending higher, driven by expansionary monetary policy by central banks, pent-up demand for commodities following the Coivd-19 lockdowns, moves by companies to replenish or build up inventory, and also due to significant supply-side constraints. Now inflation appears to be here to stay, with the 10-Year Breakeven Inflation rate, which captures expected inflation rates over the next ten years standing at around 2.4%, around the highest levels it has been since 2013. [1]

So how should equity investors play the current inflationary environment? Our theme on Stocks To Play Rising Inflation includes stocks that could remain stable or potentially even gain from higher inflation rates. The theme has outperformed, returning about 18% year-to-date, compared to a return of just about 12% on the S&P 500. However, it has underperformed since the end of 2019, returning just about 1% Since versus 30% for S&P 500. The theme is predominantly comprised of stocks from the banking, insurance, consumer staples, and energy sector, which stand to benefit from higher inflation in the longer run. We have excluded sectors such as metals, building materials, and semiconductor manufacturing which have fared exceedingly well through the initial reopening but look poised to peak.  Here is a bit more about the stocks and sectors in our theme.

Banking Stocks: Banks make money off the net interest spread, which is essentially the difference between interest rates on deposits and interest rates the bank receives from loans it makes. Now higher inflation typically results in rising interest rates and this, in turn, can help banks boost their net interest income and earnings. Separately, banks also stand to benefit from increased credit card spending by consumers. Banks in our theme include Citigroup (C) and U.S. Bank (USB): – which have a higher exposure to the retail banking space. Citi stock is up by 26% year-to-date, while U.S. Bancorp is up 28%.

Insurance stocks:  Insurance companies typically invest excess capital from underwriting to generate interest income. Now higher inflation, which leads to higher interest rates, can also help boost their profitability. Companies such as The Travelers Companies (TRV) and Chubb (CB), which are more reliant on investment income compared to peers in the insurance space, should stand to benefit. Travelers stock is up by about 12% this year, while Chubb is up 8%.

Consumer staples: Consumer stocks should also hold up well in the face of higher inflation. Demand for these companies remains stable as they deal with essential products., and these companies can also pass on higher costs to customers. Our theme includes Tobacco giant Altria Group, (MO) which is up 21% this year, food, and beverage major PepsiCo (PEP) which is roughly flat, and consumer products player Procter & Gamble (PG), which is down about 1%.

Oil and Gas:  Energy stocks have a nice track record of performance during periods of rising consumer prices. While expanding economies should bode well for oil demand and pricing, big oil companies also have high operating leverage which helps them deliver higher profit as revenue grows. Picks in our theme include oil and gas bellwether Exxon Mobil (XOM), which has gained a whopping 43% this year, and Chevron (CVX), which is up by about 23%.

Our theme of Capex Cycle Stocks includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players that stand to benefit from higher capital spending by businesses and the government.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Feb 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 XOM Return 6% 31% -11%
 S&P 500 Return -2% -7% 97%
 Trefis MS Portfolio Return 1% -9% 259%

[1] Month-to-date and year-to-date as of 2/13/2022
[2] Cumulative total returns since the end of 2016

 

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Notes:
  1. 10-Year Breakeven Inflation Rate, St. Louis Fed []