How Will The Inflation Theme Fare As Big Rate Hikes Loom?

C: Citigroup logo

Our theme of Inflation stocks which predominantly includes companies from the banking, insurance, consumer staples, and energy sectors – has risen by about 11% year-to-date, considerably outperforming the S&P 500 which remains down by about 13%, and the Nasdaq-100 which remains down by 21% over the same period. The outperformance is driven by surging prices, with U.S. inflation hitting fresh 40-year highs of around 8.5% in March amid continued supply-side constraints following the Covid-19 reopening, a tight labor market, and the impacts of the Russian invasion of Ukraine which has resulted in surging energy 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 in March.  The next rate-setting meeting is due on Wednesday and it’s looking likely that the central bank will raise the benchmark short-term interest rate by a half-percentage point and more similar hikes are expected in June and July. Policymakers are hoping that more limited money supply will put the brakes on-demand growth and rising prices. 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 start to 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, in turn, hurt the stocks in our theme.

Within our theme, energy players Exxon Mobil stock (NYSE: XOM) and  Chevron stock (NYSE:CVX) have been the strongest performers rising by about 35% each respectively year-to-date due to elevated oil and gas prices. Insurance players have also fared well with most insurance names remaining in the green, as they typically invest excess capital from underwriting to generate interest income and stand to benefit from rising rates.  On the other side, banking major Citigroup (NYSE:C), is down 19% year-to-date, as the banking sector could face headwinds due to the prospect of slowing economic growth.

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What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
YTD [1]
Total [2]
 C Return 1% -19% -18%
 S&P 500 Return 1% -13% 86%
 Trefis Multi-Strategy Portfolio 0% -17% 228%

[1] Month-to-date and year-to-date as of 5/3/2022
[2] Cumulative total returns since the end of 2016

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