The over $7 trillion in 401(k) assets are currently under fire. Year to date, bond and stock indices are both down, and 401(k) options typically do not carry a commodity offering. Moving assets to cash protects on the downside but loses value to inflation. In this current environment, most 401(k) plan assets have nowhere to hide from the market carnage.
Commodities have had a strong start to the year, and with inflation increasing by the month, may continue this trend. Historically, inflationary periods last a decade and the key to controlling inflation is getting the Fed Funds Rate above the inflation rate. This would imply a Fed Funds Rate of 9% in today’s world, an increase of over 850 basis points! During these inflationary periods, commodities have historically outperformed the S&P 500 as shown in the chart below. The Producer Price Index takes into consideration a basket of commodities, and when this chart is trending downwards these commodities were outperforming the S&P 500.
401(k) offerings being so limited and also being long term investment vehicles presents a challenge we have not seen in a while: how can I as an Advisor protect my clients assets, provide them a chance to grow in the current environment, and limit overall risk?
It may be a good time to consider adding further commodity exposure to your core portfolios. Interest rates rising will likely slow down the economy as money becomes more expensive, but are not rising at a rate that is fast enough to completely control inflation. If rates continue to rise and inflation persists, stocks and bonds may be in for a highly challenging period. The only other typical area to invest in would be commodities, which have seen further demand escalations since Russia, and major commodity producer, has been removed from many supply chains.
We may be in for a decade of prices increasing and interest rates rising, falling, and rising again. There are going to be incredible investment opportunities during this time, and it is important to consider the whole spectrum. It may be time to reexamine your portfolio mix to better insulate your clients from the inflation and rate hikes we are experiencing.