With the economy continuing to improve, investors have to increasingly think about the prospect of tighter monetary policy in the form of rising interest rates.
Federal Reserve Chair Janet Yellen has suggested the first Fed rate hike could come in mid-2015.
Higher interest rates mean higher borrowing costs, but rates tend to rise when the economy is improving, which means high sales for companies.
So, the risks for investors are not one-sided.
For some guidance, Guggenheim Partners’ Scott Minerd looks to history.
“During the 12 months before a Fed tightening cycle begins — a period we could now be entering — U.S. equities have typically outperformed fixed income by a wide margin,” noted Minerd. “In the last five periods leading up to Fed tightening, the S&P 500 has gained 22 per cent on average in the year before the Fed began raising rates, compared to 4.2 per cent or less for fixed-income assets.”
Minerd compares the performance of the S&P 500 with for fixed income classes.
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