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The March 21 announcement by new Fed Chairman Jerome Powell indicated that the Federal Reserve is likely to be more aggressive in its rate hiking policy over the next few years as the effects of reduced business regulation, broad fiscal spending, and stimulative tax cuts are fully incorporated into the economy. After nearly a decade of the effective Federal Funds Rate hovering around 0%, we feel the time for investors to critically evaluate their portfolio's performance in rising interest rate environments has arrived.
Looking at tables of historical performance for a number of asset classes in rate hiking cycles over the last 50 years, perhaps most striking is the performance of commodities—including gold.
Fed funds target rate hikes
Rate-hike cycle and annualized asset return during hiking cycle (%)
Source: FactSet; Bloomberg; FRED; Robeco. Data as of December 31, 2017. Note: annualized figures derived using monthly returns. "U.S. Dollar" represented by the DXY Index. "U.S. Equities" represented by the S&P 500 TR. "U.S. Treasuries" represented by the Bloomberg Barclays US Treasury TR. "U.S. Credit" represented by the Bloomberg Barclays US Credit TR. "Int'l Equities" represented by the MSCI World ex USA TR. "Gold" represented by gold commodity. "Commodities" represented by the S&P GSCI TR. Past performance is not indicative of future results. This information is being provided for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. No market data or other information is warranted or guaranteed by VanEck.
Commodities and interest rates both tend to rise late in the economic/business cycle. As a normal cycle develops, the economy expands and gains momentum. Demand for commodities also begins to outpace production and existing supply. The Fed generally responds to this economic momentum by raising rates as inflationary expectations begin to rise. The objective is to extend the economic cycle by keeping interest rates at a level that allows the economy to operate at full employment while maintaining its predetermined inflation target (2% in the current cycle). This is why when you look back at prior expansionary economic cycles, commodities tend to rise as the central bank raises rates.
Economic/business cycles are never exactly the same, and the current cycle is no exception. But we are most likely entering the late stages of this expansion. Once again interest rates are rising along with commodity prices. This economic upturn has been the slowest post-war expansion we have experienced and is soon to become the longest. Consequently, the global economic expansion has taken longer than expected but is gaining momentum. Demand is starting to outpace production and available supply in several important sectors.
There are expected, and possibly more aggressive, interest rate hikes over the next several years, and potential commodity supply constraints resulting from years of capital expenditure reductions in the metals and oil industries. Between these, we believe investors have more than enough reasons to reconsider their allocations to this space.
IMPORTANT DISCLOSURE
This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
The views and opinions expressed are those of the speaker(s) and are current as of the posting date. Commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.
Indices are not securities in which investments can be made.
Bloomberg Barclays U.S. Aggregate Bond TR Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Bloomberg Barclays U.S. Credit TR Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of U.S. corporate bonds and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. Bloomberg Barclays U.S. Treasury TR Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. MSCI World ex USA TR Index captures large and mid-cap representation across Developed Markets (DM) countries--excluding the United States—and covers approximately 85% of the free float-adjusted market capitalization in each country. S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples. S&P® GSCI TR Index is a world production-weighted commodity index comprised of liquid, exchange-traded futures contracts and is often used as a benchmark for world commodity prices. U.S. Dollar (DXY) Index is an index designed to measure the value of the U.S. dollar relative to a basket of foreign currencies.
Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this post. Hard assets Investments are subject to risks associated with natural resources and commodities and events related to these industries. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity such as weather, disease, embargoes or political or regulatory developments. Risks may also include investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, counterparty risks, non-diversification risk, credit risk, concentration risk, and market risk. Diversification and asset allocation do not assure a profit nor protect against loss.
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