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, considerably outperforming the S&P 500 which remains down by about 16%, and the Nasdaq-100 which remains down by 25% over the same period. The outperformance comes as U.S. inflation remains stubbornly high, amid continued supply-side constraints, a hot labor market, and the impacts of the Russian invasion of Ukraine on energy and commodity pricing. Inflation stood at a higher than expected 8.3% in April, although it was marginally below March levels of 8.5%, indicating that inflation could finally be peaking.
So what’s the outlook like for the theme of inflation stocks? The U.S. Federal Reserve is getting more serious about fighting inflation. It raised benchmark rates by a quarter percentage point in March and followed this up with a half-percentage point hike in early May. Fed Chair Jerome Powell has indicated that half-point hikes are likely in June and July as well while leaving open a possibility of even larger hikes. Policymakers are hoping that a more limited money supply will put the brakes on demand growth and in turn cool down 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 theme and consider growth names 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. For perspective, the inflation theme has underperformed the S&P 500 considerably between 2017 to 2021, a period of relatively moderate inflation.
Within our theme, energy players Exxon Mobil stock (NYSE: XOM) and Chevron stock (NYSE:CVX) have been the strongest performers rising by roughly 40% 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 24% year-to-date, as the banking sector could face headwinds due to the prospect of slowing economic growth.
- Is Citigroup Stock Fairly Priced?
- Is Citigroup Stock Attractive At The Current Levels?
- With Recession Fears Mounting, How Is Our Inflation Theme Doing?
- These Stocks Fared Well As Inflation Roiled Markets. Will The Outperformance Continue?
- This Theme Has Soared Despite Rising Inflation. Is It Still A Buy?
- Is Citigroup Stock Undervalued?
|S&P 500 Return||-3%||-16%||80%|
|Trefis Multi-Strategy Portfolio||-4%||-20%||218%|
 Month-to-date and year-to-date as of 5/16/2022
 Cumulative total returns since the end of 2016