As my colleague
Rick Rieder noted in a post earlier this week
, the Federal Reserve (Fed)'s recently released minutes and
Jackson Hole Symposium comments suggest that a period of rate
normalization is approaching.
In other words, while rates should remain relatively low over
the long term and the rate normalization process will be a slow
one, the Fed is likely to begin raising rates in the first half
of 2015, and the first rate hike could come as early as March,
earlier than many market watchers expect.
Rick covered a bit about what this means for the markets and
the economy, but you may still be wondering how to position your
portfolio for normalizing rates. In my last weekly commentary, "
Rethink 'Safe Havens' as Rates Ready to Rise
," I advocate caution toward these two asset classes.
Treasury bonds with two- to five-year
While longer-term interest rates have remained stable, the
prospect for an early Fed tightening is exerting downward
pressure on the prices of shorter-maturity Treasury bonds -
particularly those with two- to five-year maturities
- and pushing yields higher. I continue to advocate caution
toward these maturities, as I expect they will prove the most
vulnerable if the Fed does in fact accelerate the timetable of
the first rate hike.
Commodities like gold.
In addition to short-maturity bonds, another asset class that is
proving vulnerable to rising rates is commodities. The prospect
for tighter monetary conditions is driving the dollar higher and
putting downward pressure on many commodities.
Stronger economic data and the prospect for tighter monetary
conditions recently pushed the dollar to its highest level since
last September. Along with a stronger dollar, the potential for
higher real (i.e., inflation-adjusted) rates and a declining
geopolitical risk premium have pushed the gold price down 5% from
its July high.
Other commodities have suffered as well: Most agricultural
commodities are down between 5% and 10% year-to-date, and
oil prices have slid on less angst over Iraq and the Middle
. Among these various commodities, I
remain particularly cautious of precious metals given their
sensitivity to higher real rates
As for which asset classes I like, I
continue to prefer stocks
over the "traditional "safe-haven" assets I mention above. Why?
Traditional "safe haven" assets such as short- to
intermediate-duration U.S. Treasuries and gold may, in fact, be
more vulnerable than stocks in the near term as a period of
interest rate normalization approaches. Although not cheap,
stocks have the tailwinds of still-low rates and improving
economic conditions at their back.
The stock market continues to wrestle with a series of
counterforces, and for now, low rates and an improving U.S.
economy are trumping full valuations and lingering geopolitical
risks, allowing stocks to move higher.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts