Explore Our investment Outlook
We’re at an extraordinary place in financial markets—there’s war in Eastern Europe, inflation is at its highest level in decades, and the Fed is embarking on a campaign to hike interest rates. Despite these challenging market conditions, we remain patient and are looking toward 2023 and beyond.
Our short-term thinking is consistent with our long-term approach. We believe companies with the competitive positions to pass on price increases; the balance sheets to mitigate higher interest expenses; and business models able to leverage productivity benefits will outperform over time.
We believe monetary policy will remain accommodative by historical standards and new secular growth drivers will resume. Compelling trends that we see include: enterprise digital transformation, cybersecurity, digital payments, new drug discoveries, medical device innovation and electric vehicles.
We believe it’s important to own companies benefiting from these tailwinds to help mitigate any headwinds from an economic slowdown. In addition, while growth stock valuations have come down a great deal in the last six months, they remain in expensive territory given reasonable earnings expectations. This presents the possibility of further downward pressure on growth stocks.
In such an event, we think it is appropriate to accumulate certain growth companies, given the market correction we have already observed. We also believe valuations now likely present an attractive risk-reward for long-term investors. Until valuations reach normal-to-cheap territory, we are focusing on individual security selection.
Fading stimulus and the potential for COVID-19 to transition from pandemic to endemic started a reversal in consumer spending trends that we think will continue at accelerating rates.
Data from the Federal Reserve Bank of St. Louis shows that consumer spending returned to the normal trend level in 2021. Unusually high outlays on household goods as consumers avoided crowds helped spur the rebound. More recently, spending on goods has fallen closer to normal as shown in Figure 1.
In contrast, services expenditures have recovered somewhat from their lows but remain well below the trendline. We think there’s room to grow, and it’s creating investment opportunities in service providers ranging from medical providers to travel companies.
Real Consumer Spending
Real Consumer Spending: Goods
Real Consumer Spending: Services
Data as of 11/31/2021. Source: Real Personal Consumption Expenditures, Federal Reserve Bank of St. Louis.
The pandemic has delayed elective medical procedures for millions of people. We think medical technology companies may benefit as people begin to have joint replacements, spinal surgeries and other deferred elective procedures.
Postponed procedures and staffing shortages reduced opportunities for hospitals as well. We believe higher-quality operators are positioned well as patients seek medical care in greater volumes.
Dental supply companies should also benefit from a more normal environment. Some cut costs during the pandemic to improve their profit margins and now benefit from renewed spending on elective dental procedures, including braces and implants.
In addition to the uptick in medical procedures, we’re seeing broader consumer interest in experiences, such as travel and tourism. Travel-related businesses globally have reported improving booking trends in early 2022. In the U.S., we think domestically focused airlines could recover more quickly than their global counterparts.
As Victor Zhang notes in his introductory comments to this Investment Outlook, we believe we’re entering a period of higher inflation that may be more persistent than many expected. We’re also experiencing rising rates, which are a headwind for corporate profits with the potential to dampen consumer and business spending.
Despite these pressures, we continue to see opportunities as value investors. A period of value outperformance that began in the second half of 2021 has continued in the opening months of 2022.
We continue to emphasize quality in our portfolios with a preference for market leaders with strong operations and pricing power. In particular, we're seeing opportunities among makers of day-to-day consumer products, such as food, snacks and toiletries. These companies sell products that consumers have tended to purchase regardless of the economic conditions. They have historically faired well during times of high inflation and rising rates because their strong market positions enable them to raise prices and prudently manage costs.
The largest land war in Europe since World War II is not only a human tragedy, but also has massive economic and financial consequences. Consider the implications for inflation. In energy markets, Russia is a major supplier. Our own analysis suggests that Russia’s invasion may be adding as much as $25 to the price of a barrel of oil.
The conflict could also have knock-on effects in other markets. Russia is a key exporter of many industrial commodities, while Ukraine is considered the “breadbasket of Europe” and a leading global supplier of wheat and corn. Higher inflation acts as a tax on consumer spending and is likely to weigh on global economic growth.
Even before the invasion, 2022 was shaping up as a year of tremendous change. After falling for 40 years, inflation has begun to rise very rapidly. This year also marks the transition to tighter monetary policy as the economic recoveries from the depth of the pandemic gain traction. Of course, this assumes that progress against the pandemic and its variants is real and lasting.
During uncertain times like these, some investors investigate hedges against unsettled markets. Some consider gold.
Gold’s price is volatile and has a low correlation with other asset classes, which may make it an effective diversifier under some conditions. The near-term outlook for gold is mixed. In its 2022 outlook, the World Gold Council indicates gold has tended to underperform equities in advance of Fed tightening cycles. But it also shows that gold has historically outperformed following the initial rate hike.
Gold also tends to do well when real interest rates are low or negative, as they are now. (Real rates are measured by bond yields minus the rate of inflation.) Negative real rates are typically associated with inflation. As of late February, the Consumer Price Index in the U.S. is running at a 40-year-high 7.5% annual rate. At the same time, the 10-year Treasury note yield was approximately 2%.
Finally, we must say a word about gold’s traditional role as an inflation hedge. Gold’s relationship with inflation began to weaken during inflation’s long decline beginning in the 1980s as shown in Figure 2. But we may be seeing a reversal because the price of gold has risen since the latest inflation surge began in April 2021.
Data from 1/31/1979 - 12/31/2021. Source: World Gold Council.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.
Diversification does not assure a profit nor does it protect against loss of principal.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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