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Growth Stocks vs. Inflation: How Inflation Affects Growth

Let’s compare growth stocks vs. inflation, examine the current inflationary environment and discuss how you can navigate it to invest wisely.
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Growth stocks can represent some of the most exciting investment opportunities out there. This is because these young companies create an opportunity for outsized returns. Buying a reputable growth stock today could be like buying Amazon stock back in 2005. There’s just one problem. Right now, we are also in the midst of record-high inflation. Traditionally, inflationary environments are a bad time to buy growth stocks. So what should you do? Let’s compare growth stocks vs. inflation, examine the current inflationary environment and discuss how you can navigate it to invest wisely.

What Is a Growth Stock?

A growth stock is a share in a company that is poised to grow significantly faster than the overall market. Usually, these are young, exciting companies such as Airbnb, Uber, or Dutch Bros. Growth stocks typically have rapidly growing revenues, are unprofitable, and invest all their income into growing their business.

Here are a few common takeaways of investing in growth stocks:

  • Price appreciation: Investors buy growth stocks in hopes that their share price will increase at a rate faster than the S&P 500.
  • Richly valued: Analysts value growth stocks at many multiples of their earnings. This valuation is based on the company’s projected future earnings.
  • No dividends: High-growth companies prefer to invest money back into their business instead of paying dividends.

Growth stocks also typically rely on outside funding from investors. Since they are so young, they do not have large cash piles. Instead, they rely on venture capital, investment banks, or other investors to grow their business.

Now, let’s examine inflation and how it can impact growth stocks.

How Does Inflation Work?

Inflation is defined as the decrease in the purchasing power of money over time. Another way to describe this is “the steady increase in the price of goods over time”. Essentially, the world that we live in consistently becomes more expensive due to inflation.

There are plenty of real-world examples of inflation. When McDonald’s first debuted its Big Mac in the 1960s, it cost just 45 cents. Today, that same Big Mac costs $5.11.

Additionally, inflation isn’t just limited to Big Macs. It occurs in pretty much every single product category. The main reason that inflation occurs is that the Federal Reserve prints more money. As the money supply increases, the purchasing power of each dollar decreases.

The Current Inflationary Environment

Thanks to COVID-19 stimulus packages, we are currently experiencing the highest levels of inflation since the 1980s. At first, the Federal Reserve announced that this inflation was transitionary. They blamed the inflation on COVID-19 shutting down supply chains. However, high rates of inflation have persisted for several months now.

In May 2022, the rate of inflation sat at 8.6%. This means that the dollar is losing 8.6% of its value year over year.

To combat this rise in inflation, the Federal Reserve is increasing the interest rate. The interest rate is a tool that the Fed leverages to slow inflation. Raising interest rates makes it more expensive to borrow money and helps cool the economy. With that in mind, let’s examine growth stocks vs. inflation and how these two interact with each other.

Growth Stocks vs. Inflation

When we discuss inflation, we typically focus on how it impacts consumers. For example, higher prices at the grocery store squeeze consumers’ budgets. This makes it harder for people to afford groceries. However, this same scenario happens to companies. During periods of high inflation, it becomes more expensive for companies to manufacture goods.

For example, let’s examine a growth stock like Roku. Roku creates digital media players that plug into the back of a TV. These media players give customers access to streaming platforms. Higher inflation increase Roku’s manufacturing costs. This makes it more expensive for Roku to manufacture its media player. Since Roku is a younger company, it isn’t able to simply increase its prices to offset this rise in costs. Increasing prices could decrease sales dramatically. This puts Roku in a precarious situation.

Double Whammy

On top of higher production costs, growth stocks need to deal with higher interest rates. Increased interest rates hurt growth stocks in three ways:

  1. Cheaper valuations: Investors value growth stocks based on their projected future earnings. When interest rates are higher, investors reduce these projections.
  2. Less access to capital: Growth stocks require funding from investors to grow. When interest rates are higher, it becomes more expensive to borrow money. This means it will take longer for growth stocks to, well, grow.
  3. Transition to safer assets: Growth stocks are usually companies with relatively unproven business models. This inherently makes them riskier than assets like value stocks, bonds, or real estate. During periods of high interest rates, institutional investors tend to move their money out of growth stocks and into other assets.

Same Player, Different Team

Growth stocks vs. inflation can be a confusing topic. This is because investor sentiment changes incredibly quickly. In 2021, many growth stocks were flying high. Fast forward just one year, however, and these same stocks are down big. At the same time, not much has changed at these companies. So what happened? To examine this, let’s look at an analogy.

Imagine a star quarterback for an NFL team. This quarterback is dual-threat and prefers to scramble and create plays on his feet. Sports analysts love him and he is very well paid. However, his contract ends and he gets traded to a team that runs a pro-style offense. This style of offense doesn’t complement the quarterback’s skills. For this reason, he likely won’t perform as well over the coming years. Even though the quarterback has the same skill level, analysts start to change their opinion on this quarterback.

In this scenario, nothing inherently changed about the quarterback. Instead, it was his surrounding environment that changed. The same thing happens with growth stocks. During low interest/inflation periods, growth stocks thrive. But, not so much during periods of high inflation.

Hopefully, this has given you a clearer picture of growth stocks vs. inflation. But, we still have to answer a big question: how should you react to all of this?

Should You Still Invest in Growth Stocks?

This depends on your time horizon. Despite the recent selloff in growth stocks, it doesn’t mean that you should avoid them altogether. In fact, high inflationary periods could be a great time to establish a large position in quality companies. However, you will likely have to wait longer for this investment to pay off. Growth stocks may still be successful but it will likely take them longer to reach their growth projections.

I hope that you’ve found this article on growth stocks vs. inflation to be valuable! Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.

The post Growth Stocks vs. Inflation: How Inflation Affects Growth appeared first on Investment U.

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There will soon be one million seats on this popular Amtrak route

“More people are taking the train than ever before,” says Amtrak’s Executive Vice President.

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While the size of the United States makes it hard for it to compete with the inter-city train access available in places like Japan and many European countries, Amtrak trains are a very popular transportation option in certain pockets of the country — so much so that the country’s national railway company is expanding its Northeast Corridor by more than one million seats.

Related: This is what it's like to take a 19-hour train from New York to Chicago

Running from Boston all the way south to Washington, D.C., the route is one of the most popular as it passes through the most densely populated part of the country and serves as a commuter train for those who need to go between East Coast cities such as New York and Philadelphia for business.

Veronika Bondarenko captured this photo of New York’s Moynihan Train Hall. 

Veronika Bondarenko

Amtrak launches new routes, promises travelers ‘additional travel options’

Earlier this month, Amtrak announced that it was adding four additional Northeastern routes to its schedule — two more routes between New York’s Penn Station and Union Station in Washington, D.C. on the weekend, a new early-morning weekday route between New York and Philadelphia’s William H. Gray III 30th Street Station and a weekend route between Philadelphia and Boston’s South Station.

More Travel:

According to Amtrak, these additions will increase Northeast Corridor’s service by 20% on the weekdays and 10% on the weekends for a total of one million additional seats when counted by how many will ride the corridor over the year.

“More people are taking the train than ever before and we’re proud to offer our customers additional travel options when they ride with us on the Northeast Regional,” Amtrak Executive Vice President and Chief Commercial Officer Eliot Hamlisch said in a statement on the new routes. “The Northeast Regional gets you where you want to go comfortably, conveniently and sustainably as you breeze past traffic on I-95 for a more enjoyable travel experience.”

Here are some of the other Amtrak changes you can expect to see

Amtrak also said that, in the 2023 financial year, the Northeast Corridor had nearly 9.2 million riders — 8% more than it had pre-pandemic and a 29% increase from 2022. The higher demand, particularly during both off-peak hours and the time when many business travelers use to get to work, is pushing Amtrak to invest into this corridor in particular.

To reach more customers, Amtrak has also made several changes to both its routes and pricing system. In the fall of 2023, it introduced a type of new “Night Owl Fare” — if traveling during very late or very early hours, one can go between cities like New York and Philadelphia or Philadelphia and Washington. D.C. for $5 to $15.

As travel on the same routes during peak hours can reach as much as $300, this was a deliberate move to reach those who have the flexibility of time and might have otherwise preferred more affordable methods of transportation such as the bus. After seeing strong uptake, Amtrak added this type of fare to more Boston routes.

The largest distances, such as the ones between Boston and New York or New York and Washington, are available at the lowest rate for $20.

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The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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