With Recession Fears Mounting, How Is Our Inflation Theme Doing?

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Our theme of Inflation stocks – which predominantly includes companies from the banking, insurance, consumer staples, and oil and gas sectors – has declined by about 8% over the last month, marginally underperforming the broader S&P 500. While the theme outperformed considerably from January through May, rising by almost 10%, as the Russian invasion of Ukraine and supply-side constraints following the Covid-19 reopening resulted in soaring energy and commodity prices, there are a couple of factors that have resulted in the recent pullback.

While the U.S. Federal Reserve took some time to respond to inflation, starting with a 0.25% rate hike in March 2022, it is getting more aggressive with its monetary policy tightening, after inflation numbers for May came in higher than expected. The central bank raised rates by 0.75% in June, its largest hike since 1994, and it appears likely that more similar hikes are possible in the coming months, as well, as policymakers hope that higher rates and more limited money supply will put the brakes on demand growth and, in turn, cool down prices. The markets are increasingly betting that the Fed’s tightening cycle will result in a hard landing of sorts for the U.S. economy. Oil prices fell by as much as 10% on Tuesday amid renewed recession fears, while commodity prices also remain well below their highs. This is likely impacting the stocks in our theme.

Within our theme, energy major Exxon Mobil stock (NYSE: XOM) has been the strongest performer rising by almost 39%  year-to-date due to elevated oil and gas prices. Insurance players have also fared well with the insurance stocks in our theme remaining in the green, as they typically invest excess capital from underwriting to generate interest income and stand to benefit from rising interest rates.  On the other side, banking major Citigroup (NYSE:C), is down 26% 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 Jul 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 XOM Return -1% 39% -6%
 S&P 500 Return 1% -20% 71%
 Trefis Multi-Strategy Portfolio 5% -23% 208%

[1] Month-to-date and year-to-date as of 7/6/2022
[2] Cumulative total returns since the end of 2016

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