When Inflation Rises, Market Leaders Change

For roughly two years, investors have enjoyed a comfortable environment: stable, predictable inflation. That calm has largely benefited so-called “growth” companies — large technology firms first among them.

That backdrop may now be tested. April’s inflation data surprised to the upside, driven mainly by the surge in energy prices caused by the closure of the Strait of Hormuz, a strategic passage for the world’s oil. The consumer price index reached its second-highest level since June 2022. One month does not make a trend, but the question deserves to be asked: what if inflation were to move durably higher?

What history teaches us

Market data going back to the 1970s is clear: when inflation rises, the stock market’s winners change. Growth sectors — technology, consumer discretionary, financial services — have historically struggled in those periods. Conversely, sectors tied to real assets, pricing power and essential demand — energy, materials, consumer staples — have tended to fare better.

The mechanics are simple: higher inflation pushes interest rates up, compresses the valuation multiples of companies whose profits sit far in the future, and raises costs for businesses unable to pass the bill on to their customers.

A peace agreement between Iran and the United States?

The details of the peace agreement between the United States and Iran have yet to be revealed, but oil prices are already reacting. Brent crude, the international benchmark, fell nearly five percent to US$83.17 a barrel on Monday.

While that remains more than US$10 above where Brent traded before the war in the Middle East began, some analysts believe consumers should brace for elevated gasoline prices for the foreseeable future. “The new normal, so to speak, for oil markets is very, very different from what it was three or four months ago. We think US$80 (a barrel) will be the floor for now,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners LP.

Markets have so far responded positively to the prospect of an agreement, whose official signing remains to be confirmed.

There is no path to peace. Peace is the path.

Mahatma Gandhi

What this means for your portfolio

The point is not to predict the next inflation number — no one can. The point is to make sure your portfolio is not built for a single scenario. Reach out to our team for a review of your asset allocation: together, we will assess your exposure to growth sectors, identify relevant adjustments and make sure your strategy remains aligned with your objectives, whatever inflation regime lies ahead.

Source: Canoe Financial.