Kingsmill's Investment Miscellanea: Friday March 18th, 2022

March 18, 2022 | Joshua Kingsmill


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If you’re an economist-geek-historian like me: there was big news this week in the US.  For the first time since December 2018, they raised interest rates (and the last time it was short lived, as they had to backtrack the following July and begin cutting again). 

 

The goal of course, is for raising interest rates to temper the inflation over time, that has been as high as it’s been in decades.  Without getting too technical however: the price of Oil, which has meant higher prices at the pumps, as well as heating, electricity, etc., has been by far the dominant aspect of inflation. And interest rates don’t really affect the change of Oil in the context of what is going on in the world at the moment.

 

Indeed, in the last two weeks, Oil has gone from over $130 per barrel to under $100: that’s a price reduction that is a function of supply and demand, as well as the geo-politics of the moment. This has a far more meaningful effect on inflation than anything governments can do on the interest rate front. Over time, I’d expect Oil to find a new “normal”, higher than it was in the last few years, but not at the $130 level: this will be a great relief to inflation, all on its own.

 

So we are in this “dance”: rates need to go up, after years of being incredibly low, but we don’t want an increase in rates to cause the economy to go into a recession. I thought this chart was interesting: stocks markets can still appreciate in a rising rate environment:

 

 

Just as investors had to “pivot”, when the Covid pandemic became a clear game changer for the economy and the types of companies that prosper, so too will the need to be mindful of what has historically worked when interest rates rise:  Some industry sectors have tended to perform better than others during hiking cycles. Over the past 30 years, median returns 12 months after the first hike were better than the overall market for Technology (+29%), Energy (+26%), Financials and REITs (both +15%), and Industrials (+14%).

 

I’m working on my next client-only seminar, and it will be, no surprise, about inflation and the how it might affect all of us going forward, so stay tuned in the upcoming weeks for more details, and a Save the Date.

 

Hopefully the Spring will provide everyone more time to be outside, enjoying the relaxation of the rules, and spending time with friends and family. Don’t tell anyone, but I am down in Miami over the Spring break with the family (but working every day!).

 

I look forward to continue answering your questions, making more changes to portfolios, and planning for the future as we navigate this time.