Written by: Roland Morris , Portfolio Manager and Strategist
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.
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.
To learn more visit us at VanEck.
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.
Is Life a Game of Chess or Poker?
Weapon Sales Across the Globe Drive Safety and Security Theme
How to Sharpen Your Social Skills with Two Distinct Listening Styles
How to Find Your Authentic Voice
A Smile Is Vital to Your Message
Myth Busting the Settlement Industry
Advisors: Consider These Inexpensive Holiday Gift Ideas for Clients
7 Steps To Hire Great Team Members
An Acronym You Should Remember When Leading Change
India’s Booming Economy Expected to Firm Up Gold Demand
Investments21 hours ago
Global Equity Views 4Q 2018
Development21 hours ago
How To Deliver Value During Prospect Engagement
Financial Podcasts21 hours ago
How to Merge a CPA Firm With a Wealth Management Firm
Learn2 days ago
Millennials and Responsible Investing: Bridging the Generation Gap
Social Selling2 days ago
Is Spending Piles of Money on Marketing Just a Waste?
Building Smarter Portfolios2 days ago
Understanding Hedge Fund Replication
Insights3 days ago
Leaders: How Your Audacious Goal Can Actually Hurt People
Development3 days ago
Discouraged? Remember Why You Got in This Business