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How Asset Classes Have Performed After Interest Rate Hikes

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How to use: Arrows on side navigate between annualized return and annualized risk

Annualized returns for various asset classes during the last three periods of interest rate hikes, organized from lowest average return to highest average return.
Annualized risk for various asset classes during the last three periods of interest rate hikes, organized from lowest average risk to highest average risk.
Interest Rate Hikes_Asset Class Returns
Interest Rate Hikes_Asset Class Risk
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Preview image showing annualized returns for various asset classes during the last three periods of interest rate hikes, organized from lowest average return to highest average return

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Asset Class Performance After Interest Rate Hikes

For the first time in more than three years, the U.S. Federal Reserve has raised the target interest rate. It’s an incremental step towards fighting inflation that is at its highest level in 40 years. Not only that, the Federal Reserve is predicting six more interest rate hikes before the end of 2022.

What does this mean for investors and their portfolios? In this Markets in a Minute from New York Life Investments, we show the risk and return of select asset classes during the last three periods of interest rate hikes.

Historical Returns After Interest Rate Hikes

We looked at annualized returns, which measures the return investors would have earned in a year if returns were compounded. Here is how they break down, sorted from lowest average return to highest average return.

Asset ClassJun. 1999–
Jun. 2000
Jun. 2004–
Jul. 2006
Dec. 2015–
Jan. 2019
Average
Municipal Bonds1.6%4.9%2.7%3.1%
Short-Term Bonds5.4%2.9%1.1%3.1%
Long-Term Bonds5.1%5.6%2.7%4.5%
High-Yield Bonds-1.1%8.4%7.5%4.9%
Bank Loans4.2%5.9%5.2%5.1%
Large-Cap Value Stocks-1.4%12.6%9.1%6.8%
Large-Cap Stocks12.1%8.1%10.9%10.4%
REITs-0.6%24.4%8.4%10.8%
Gold6.7%24.5%7.2%12.8%
Large-Cap Growth Stocks24.7%3.8%12.3%13.6%
Ex-U.S. Developed Country Stocks21.6%21.5%5.5%16.2%
Global Commodities63.1%14.3%0.3%25.9%

Based on time periods from the first Federal Reserve rate hike until one month after the last rate hike, which, on average, is when the effective federal funds rate tends to stabilize.

Among fixed income investments, floating rate bank loans had the highest average return. These loans pay a spread over a specified reference rate, with the rate resetting every 30, 60, or 90 days based on the prevailing interest rate. Because the rate “floats”, payments can rise as interest rates rise. However, bank loans are made to non-investment-grade companies, which are considered to be higher risk.

Ex-U.S. developed country stocks had the highest average return of the select stock types. International stocks may be a hedge against interest rate hikes because, compared to U.S. large cap stocks, they are more heavily concentrated in cyclical sectors like materials, industrials, and financials. These sectors tend to perform well when the economy is growing and rates are rising.

Within the alternatives realm, global commodities were the strongest on average. The average is skewed upward because of the outsized return earned in the 1999–2000 period. Brazil, Russia, India, and China were rapidly industrializing, which required an enormous amount of raw materials, food, and energy commodities. The boom lasted for more than 10 years in what is known as a commodity super cycle.

The Other Side of the Coin: Risk

We also measured asset class risk using standard deviation, which looks at the amount of variation in returns. Here is how it breaks down over the last three periods of interest rate hikes, organized from lowest to highest average risk.

Asset ClassJun. 1999–
Jun. 2000
Jun. 2004–
Jul. 2006
Dec. 2015–
Jan. 2019
Average
Short-Term Bonds0.2%0.4%0.2%0.3%
Bank Loans1.9%0.7%3.0%1.9%
Municipal Bonds4.4%2.7%3.3%3.5%
High-Yield Bonds3.9%4.0%5.4%4.4%
Long-Term Bonds5.5%7.2%9.4%7.4%
Large Cap Stocks16.0%7.4%11.5%11.6%
Large-Cap Value Stocks16.3%7.2%11.8%11.8%
Ex-U.S. Developed Country Stocks14.4%10.6%11.8%12.2%
REITs10.9%13.6%13.8%12.7%
Large-Cap Growth Stocks19.4%8.0%12.2%13.2%
Gold20.0%15.6%12.9%16.2%
Global Commodities15.1%23.9%16.7%18.6%

Short-term bonds had the lowest risk, and were 25 times less risky than long-term bonds on average. Bonds with shorter maturities have a lower duration—which measures the sensitivity of a bond’s price to interest rate changes—than long-term bonds. This means their prices do not drop as much when rates rise.

Among the select stocks, large cap stocks and their value style counterparts had the lowest average risk. Value stocks tend to be established companies with actual earnings, meaning they can raise prices to boost profit margins during interest rate hikes and rising inflation.

Within the alternatives realm, real estate investment trusts (REITs) had the lowest risk. Rising rates generally means the economy is growing, which translates into greater demand for real estate and the ability to charge higher rent. Interestingly, a 40-year analysis by Nareit found that REITs performed well during both high inflation and low inflation periods. This means they are less subject to prediction risk, or the risk that investors correctly predict high-inflation periods. In contrast, commodities performed well during high inflation periods but performed poorly during low inflation.

Interest Rate Hikes and Your Investments

In addition to considering the historical returns of asset classes during interest rate hikes, investors may also consider the potential risk involved.

We looked at performance within the broader categories of fixed income, stocks, and alternatives. Historically, bank loans, ex-U.S. developed country stocks, and global commodities have offered the highest average returns. However, short-term bonds, large cap stocks, and REITs had the lowest average risk.

The current macroeconomic environment, such as the Russia-Ukraine conflict, may also play a role in performance. Will history repeat itself, or will different asset classes outperform during the interest rate hikes to come?

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Markets in a Minute

Visualizing Historical Oil Prices (1968-2022)

The real price of oil reached a seven year high amid the Russia-Ukraine war. How have other major events impacted historical oil prices?

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Historical Oil Prices (1968-2022)

Amid Russia’s invasion of Ukraine, the inflation-adjusted price of oil reached a seven-year high. Russia is one of the world’s largest producers of crude oil, and many countries have announced a ban on Russian oil imports amid the war. This has led to supply uncertainties and, therefore, rising prices.

How does the price increase compare to previous political and economic events? In this Markets in a Minute from New York Life Investments, we look at historical oil prices since 1968.

The Fundamentals Behind Oil Prices

Before diving into the data, it’s worth explaining why historical oil prices have seen so much volatility. This mainly stems from the fact that the supply and demand of oil tends to have a low responsiveness to price changes in the short term.

  • On the supply side, oil production capacity can be challenging to change quickly. Drilling a new oil well is a lengthy and complex process.
    • On the demand side, it can be quite difficult to change equipment that uses petroleum products. For instance, in the short term, people will keep driving their cars to work despite higher gas prices.

    For these reasons, in order to re-balance supply and demand, it takes a sufficiently large price change to occur. For example, if gas prices were to double, only then may enough commuters consider taking public transit or changing behavior in other ways.

    What kind of events can shock the system enough to drive big price changes?

    A large portion of the world’s oil is located in regions that are prone to political conflict. Political events can disrupt the actual or perceived supply of oil, and drive prices upwards. On the other hand, an economic downturn reduces energy demand and can depress prices.

    Looking Back at Historical Oil Prices

    To compare how events have influenced historical oil prices, we used data from the U.S. Energy Information Administration. It should be noted that the data extends to March 31, 2022, and does not reflect the recent price dips in response to Shanghai lockdowns and U.S. rate hikes.

    Here is the inflation-adjusted price of a barrel of crude oil during select events.

    DateEventCrude Oil Price per Barrel
    Real 2010 Dollars
    Q1 1971U.S. spare capacity exhausted$13.47
    Q1 1973Arab Oil Embargo$15.90
    Q1 1974Embargo lifted$42.00
    Q1 1978Iranian Revolution$39.65
    Q3 1980Official start of Iran-Iraq war$76.93
    Q1 1986Saudis abandon swing producer role$32.90
    Q2 1990Trough price prior to Iraq's invasion of Kuwait$26.72
    Q3 1990Iraq invades Kuwait$39.37
    Q4 1990Peak price during invasion$47.15
    Q2 1991Iraq accepts UN resolution to end conflict$30.18
    Q4 1996Peak price prior to Asian financial crisis$31.88
    Q3 1997Asian financial crisis begins$25.35
    Q1 1999OPEC cuts production target by 1.7M b/d$16.41
    Q4 2000Peak price prior to 9/11$38.73
    Q3 20019/11 attacks$31.76
    Q4 2001Trough price after 9/11$24.22
    Q1 2005Low spare capacity$54.71
    Q2 2008Peak price before global financial collapse$125.21
    Q1 2009OPEC cuts production targets by 4.2M b/d$42.89
    Q2 2014Peak price prior to supply gut price collapse$95.07
    Q1 2015OPEC production quota unchanged despite low prices$44.41
    Q4 2019Price immediately prior to global pandemic$50.38
    Q1 2020COVID-19 declared a pandemic$40.34
    Q2 2020Trough price during global pandemic$24.65
    Q1 2022Russia invades Ukraine$77.94

    From the first quarter of 1968 until the second quarter of 1986, data reflects the reporter refiner acquisition cost. From the third quarter of 1986 to the first quarter of 2022, data reflects the West Texas Intermediate cost.

    In 1973, the Organization of the Petroleum Exporting Countries (OPEC) announced an embargo (ban) on oil exports to the United States. The move was in response to the U.S. providing military aid to Israel. By the time the embargo ended in March 1974, the inflation-adjusted price of crude oil had risen 164%. The embargo also led to a selloff in the stock market, with the recovery taking almost six years.

    Historical oil prices rose rapidly from 2004-2008. During that time, economic growth was fueling oil demand but there was little spare production capacity. By the second quarter of 2008, inflation-adjusted oil prices hit a high of $125 per barrel. They crashed by 66% shortly thereafter due to the global financial crisis.

    Most recently, the COVID-19 pandemic and associated containment measures caused historical oil prices to drop by nearly 40% in three months. Oil prices have since risen 216% from their pandemic low, as of the first quarter of 2022. This is due to the economic recovery and Russia’s invasion of Ukraine.

    Oil as an Investment

    Investors’ interest in oil as an alternative investment has risen in recent years. Given the high volatility in historical oil prices, investors may want to consider their comfort with this level of risk. Of course, an investor’s sustainability goals may also be a factor when choosing whether to invest in oil.

    However, oil also presents opportunities. It has had low-to-negative correlation with U.S. bonds in recent years and may help investors diversify their portfolios. Not only that, it may help investors manage rising interest rates. An economic recovery typically leads to rising interest rates, but also more energy demand. Oil prices have historically climbed during these periods.

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Markets in a Minute

Mapped: Interest Rates by Country in 2022

For the vast majority of countries, interest rates are marching upward. Here’s how they break down in 2022.

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Interest Rates

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Mapped: Interest Rates by Country

Soaring inflation, the war in Ukraine, and strengthening economies are spurring interest rate increases around the world. At the same time, central banks are unwinding record monetary stimulus from COVID-19.

In this Markets in a Minute from New York Life Investments, we show interest rates by country in 2022. Interest rates are based on short-term benchmark policy rates set out by central banks.

Interest Rates Around the World in 2022

While the vast majority of countries saw a decline in interest rates over recent years, this trend is reversing for many in 2022.

After hovering at 0.0%, the U.S. increased its short-term interest rate to 0.5%. Experts project up to seven interest rate hikes this year, with interest rates rising as high as 1.9% by year-end.

For many countries in Europe, interest rates climbed out of negative territory for the first time since 2014. Interest rates now sit at 0.0% across the European Union.

Country/ Region
Short-Term Interest Rate (%)
🇦🇱 Albania1.0
🇦🇲 Armenia9.3
🇦🇺 Australia 0.1
🇦🇹 Austria0.0
🇦🇿 Azerbaijan7.8
🇧🇸 Bahamas4.0
🇧🇩 Bangladesh4.8
🇧🇧 Barbados2.0
🇧🇾 Belarus12.0
🇧🇪 Belgium0.0
🇧🇿 Belize2.3
🇧🇴 Bolivia 3.9
🇧🇼 Botswana3.8
🇧🇷 Brazil11.8
🇨🇦 Canada0.5
🇹🇩 Chad3.5
🇨🇱 Chile7.0
🇨🇳 China3.7
🇨🇴 Colombia5.0
🇨🇬 Congo7.5
🇨🇷 Costa Rica2.5
🇨🇺 Cuba2.3
🇨🇿 Czech Republic5.0
🇩🇰 Denmark-0.6
🇩🇴 Dominican Republic5.5
🇪🇨 Ecuador7.2
🇪🇬 Egypt9.3
🇫🇯 Fiji0.3
🇫🇮 Finland0.0
🇫🇷 France0.0
🇬🇪 Georgia11.0
🇩🇪 Germany0.0
🇬🇷 Greece0.0
🇬🇾 Guyana5.0
🇭🇰 Hong Kong0.8
🇭🇺 Hungary4.4
🇮🇸 Iceland2.8
🇮🇳 India4.0
🇮🇩 Indonesia3.5
🇮🇪 Ireland0.0
🇮🇱 Israel0.1
🇮🇹 Italy0.0
🇯🇲 Jamaica4.5
🇯🇵 Japan-0.1
🇯🇴 Jordan2.8
🇰🇿 Kazakhstan13.5
🇰🇪 Kenya7.0
🇰🇬 Kyrgyzstan10.0
🇱🇦 Laos3.0
🇱🇻 Latvia0.0
🇱🇧 Lebanon7.8
🇱🇸 Lesotho4.0
🇱🇾 Libya3.0
🇱🇹 Lithuania0.0
🇱🇺 Luxembourg0.0
🇲🇾 Malaysia1.8
🇲🇻 Maldives7.0
🇲🇱 Mali4.0
🇲🇽 Mexico6.5
🇲🇳 Mongolia9.0
🇲🇦 Morocco1.5
🇳🇵 Nepal7.0
🇳🇱 Netherlands0.0
🇳🇿 New Zealand1.0
🇳🇬 Nigeria11.5
🇳🇴 Norway0.8
🇵🇰 Pakistan12.3
🇵🇾 Paraguay6.3
🇵🇪 Peru4.5
🇵🇭 Philippines2.0
🇵🇱 Poland4.5
🇵🇹 Portugal0.0
🇶🇦 Qatar2.5
🇷🇴 Romania3.0
🇷🇼 Rwanda5.0
🇸🇦 Saudi Arabia1.3
🇷🇸 Serbia1.5
🇸🇱 Sierra Leone14.3
🇸🇬 Singapore0.3
🇸🇰 Slovakia0.0
🇿🇦 South Africa4.3
🇰🇷 South Korea1.3
🇸🇸 South Sudan12.0
🇪🇸 Spain0.0
🇱🇰 Sri Lanka13.5
🇸🇿 Swaziland4.0
🇸🇪 Sweden0.0
🇨🇭 Switzerland-0.8
🇹🇼 Taiwan1.4
🇹🇭 Thailand0.5
🇹🇳 Tunisia6.3
🇹🇷 Turkey14.0
🇺🇬 Uganda6.5
🇺🇦 Ukraine10.0
🇦🇪 United Arab Emirates1.8
🇬🇧 United Kingdom0.8
🇺🇸 United States0.5
🇻🇳 Vietnam4.0
🇿🇲 Zambia9.0

*Australia, China, India, Pakistan, Peru, Poland, Serbia, Romania data as of April 2022.
Reflects data for March or February 2022 depending on latest available data.
Source: Trading Economics (Apr 2022)

In Latin America, several central banks are taking a hawkish stance as oil price shocks are causing inflation to accelerate.

Mexico raised its benchmark interest rate to 6.5% in March in response to inflation hitting 20-year highs. Even before the war in Ukraine, global factors such as rising oil and import prices were already having a greater impact on Latin American countries than advanced economies.

Unlike the U.S. and most countries located in Europe and Latin America, China is anticipated to potentially lower its interest rates.

A renewed COVID-19 wave has slowed growth, with the government requiring countless factories to close in order to combat the spread of the Omicron variant. Disruptions have cascaded across supply chains—from electric vehicles to iPhones— leaving goods in shorter supply. China is responsible for roughly one-third of global manufacturing.

High-Water Mark

Which countries have the highest interest rates in 2022?

Interest Rates

At an eye-watering 80%, Zimbabwe has the highest interest rate of any country.

In early April, the central bank raised rates by 20 percentage points to combat a 73% inflation rate. Small businesses, teachers, and analysts have been urging the government to adopt the U.S. dollar to boost economic and investor confidence amid currency woes.

With an interest rate of 44.5%, Argentina has the second-highest rate. To get closer to reaching the requirements for rescheduling its $40 billion loan to the International Monetary Fund (IMF), the central bank raised interest rates for the second time this year. The IMF requires having interest rates above the rate of inflation. As of February, Argentina’s inflation exceeded 50%.

Meanwhile, oil-rich countries such as Angola (20%), Iran (18%), and Russia (17%) all made it into the top 10 for highest rates globally.

Treading Water

What is the outlook for interest rates in 2022 and beyond?

In the short term, experts believe interest rates will likely rise to fight inflation. They could also play a role in slower economic growth, especially if raised too quickly. Recently, the World Bank revised global growth to 3.2% due to the war in Ukraine and rising food and energy prices—about a percentage point lower than its previous forecast of 4.1%.

The longer-term view may look different.

Structural factors, such as an aging population, will likely lead to an increase in savings rates for retirement. In theory, higher savings rates increases the total supply of funds, depressing the interest rate. By 2100, people over 50 are projected to rise from 25% to 40% of the global population.

The end of ultra-low interest rates may be over for now, but broader factors, including growing global debt—which stands at 355% of the world’s GDP—suggests it may be a short to medium-term adjustment.

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