A key guide to positioning your portfolio for rising rates (Part 5 of 5)
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.
Market Realist – The graph above shows the performance returns of the S&P 500, as tracked by the iShares Core S&P 500, and U.S. Treasuries, as tracked by the iShares 1-3 Year Treasury Bond ETF (SHY), the iShares 7-10 Year Treasury Bond ETF (IEF), and the iShares 20+ Year Treasury Bond ETF (TLT).
The broader stock market indices—like the S&P 500 (SPY), Dow Jones Industrial Average (DIA), and NASDAQ (QQQ)—have outperformed safe haven assets like U.S. Treasuries. This trend persists despite rising geopolitical tensions and generally weak economic data from Europe (EZU), China (FXI), and Japan (EWJ).
Stock markets tend to perform better in a rising rate environment than bonds.
Read more about rising rates and your portfolio in our series Must-read: The rate rise timeline you should watch for now .
Sources: BlackRock, Bloomberg
Browse this series on Market Realist:
- Part 1 - Must-know: A period of rate normalization is approaching
- Part 2 - A key guide to positioning your portfolio for rising rates
- Part 3 - Why gold isn’t safe for your portfolio when rates are rising