The late stage of the investment cycle could last for a considerable time, but it often isn’t kind to financial assets, suggests Bob Carlson, editor of Retirement Watch.
The late stage usually is characterized by strong growth, rising wages and pressure for higher inflation. Interest rates generally rise. These trends tend to hurt prices for both stocks and bonds.
The portfolio strategies that worked for many investors in recent years aren’t likely to be effective in this stage of the cycle and the next one. Many people will find that having a portfolio consisting primarily of U.S. stocks and bonds means they don’t have diversification and downside protection.
Commodities and inflation hedges tend to do well in the late stage of the cycle. That’s why we own them in most of the portfolios and will be increasing our holdings of them as the cycle progresses.
Stocks outside the United States have lower valuations and higher growth potential than U.S. counterparts. In the next year or so, in addition to providing higher returns, they should give more diversification and protection.
Commodities have been registering strong returns since the bottom of their bear market in early 2016, but they really took off recently. iShares Commodities Select Strategy (COMT) returned 4.24% in the last four weeks and 4.82% for the year to date. It is also up 16.80% over the last 12 months.
Some of the recent surge was due to an increase in energy prices, and a lot of that increase was a consequence of the conflict with Syria. But that’s not the only support for rising commodity prices. Global growth continues, increasing demand for commodities.
Demand is rising faster than supply. That’s going to continue for a while, because a lot of production capacity was shut down during the 2014-2016 bear market. It takes some time, usually several years, for production to ramp up, so I expect this imbalance to continue for a while.
Rising inflationary expectations also boost commodity prices. That’s another trend I expect to continue as long as the global economy is growing. I think COMT is one of the better ways for individuals to invest in commodities. It is a low-cost exchange-traded.
Instead of tracking an index, the fund is managed by BlackRock using a proprietary formula that allocates the fund among the commodities included in the S&P Goldman Sachs Commodity Index. The fund doesn’t try to capture short-term market moves; it focuses on intermediate- and longer-term trends.
COMT invests in a combination of commodity futures and stocks of commodity producers. Lately, it has been about 30% in stocks and 70% in futures. The fund almost always is at least 25% invested in energy commodities.
