Inflation has been red hot since 2021 and has been very apparent in our day to day lives, most notably at the gas pump.

The Federal Reserve and other central bankers around the world exist to curb inflation. The United States Federal Reserve has not outright said it will raise interest rates in 2022, but it is very well implied. Raising interest rates is what helps to fight inflation. The consequence of raising interest rates is that credit becomes expensive, so borrowing money costs more in interest payments. Companies that have levered their balance sheets to fuel growth take a nail in the head. These are more of the smaller growth companies.

You may have heard about the debate of growth versus value stocks. Over the last 6 years growth stocks have trumped value stocks. Growth stocks are stocks of companies with a promising future and the company is expected to grow rapidly, poised to outperform the market. Value stocks are of those companies whose share price is less than what they are actually worth. Value stocks because of their discount to market value are supposedly poised to provide a superior return.

Growth stocks are typically of companies that are young, and they tend to lever their balance sheet to fuel their growth. These companies typically do not pay a dividend because they want to use their retained earnings to fuel their growth.

Values stocks are companies that have been around a while and are no longer growing. These companies typically pay a dividend.

Now the since the Federal Reserve is about 99% likely to raise interest rates, those higher interest rates hurt growth stocks more. Inflation has been red hot as we mentioned, and now growth stocks could take a seat while value stocks rally and outperform the market.