Our theme of Inflation stocks – which predominantly includes companies from the banking, insurance, consumer staples, and energy sectors – has risen by about 9% year-to-date, compared to the S&P 500 which remains down by about 5%, and the Nasdaq-100 which remains down by 12%. The outperformance is driven by surging prices, with U.S. inflation hitting fresh 40-year highs over February amid continued supply-side constraints and a tight labor market. It’s likely that March inflation numbers, which are due next week, will be still higher, considering the impacts of the Russian invasion of Ukraine, which began in late February, and elevated oil and gas prices.
So what’s the outlook like for the theme? The U.S. Federal Reserve is getting more serious about fighting inflation. It raised benchmark rates by a quarter percentage point last month, and multiple half percentage-point rate increases are looking like a possibility going forward as the Fed looks to limit money supply and put the brakes on-demand growth. Although it remains to be seen just how effective the Fed’s moves will be in containing the price rise, we don’t think the inflation theme will outperform meaningfully in the longer term. If inflation cools off, investors could look beyond the inflation theme and consider growth stocks once again. On the other side, if inflation persists, it could eat into consumer spending power, impacting the broader U.S. economic growth and the stocks in our theme.
Within our theme, Chevron stock (NYSE:CVX) has been the strongest performer, rising by 38% year-to-date in 2022. Exxon Mobil stock (NYSE: XOM) has also done very well, rising by 31% year-to-date. On the other side, Citigroup (NYSE:C) has been the weakest performer, with its stock down by roughly 16% thus far in 2022.
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.
|S&P 500 Return||0%||-5%||102%|
|Trefis MS Portfolio Return||0%||-8%||262%|
 Month-to-date and year-to-date as of 4/7/2022
 Cumulative total returns since the end of 2016