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Trends Watch: August 2, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.

This week, Elana talks with Nathaniel J. Polachek, Portfolio Manager and Partner, Commodity Asset Management.

What is your outlook for alternatives or, more specifically, commodities?

We anticipate continued growth for alternative investments, especially given recent stock market volatility and global uncertainty. Portfolio optimization research supports investing 10% of one’s assets in commodities, which yields better overall risk/reward, compared to traditional stock and bond allocations. During periods of both economic expansion and elevated inflation expectations, we expect commodities to outperform all other major asset classes. However, index funds are inadequate for commodity investments, as they guarantee a loss during market declines. As an example, during the last 18 years, the Bloomberg Commodity Index has been up during ten of those years, and down during eight. We believe investors should look to active managers, especially within commodities, to give them the potential to profit even during down markets.

What is your outlook for the economy?

We believe that the underlying economy is strong, but are mindful of the significant economic disruptions a trade war with China may cause. Over the first quarter of this year, the majority of U.S. corporations projected that their businesses would increase spending and staffing over the remainder of the year. GDP has risen by an average of 2% during the current economic expansion, which is much slower than over previous periods of growth. On the labor front, more workers are voluntarily leaving their jobs than in the past, leading us to believe that the underlying labor market is strong, despite lackluster wage growth. Consumer prices are increasing, and we believe that a trade war could exacerbate this inflationary trend. We remain cautious about equity prices, as the S&P 500 has historically peaked at an average of 30 months after the initial rate hike following a recession. During the current cycle, the Federal Reserve first raised rates in December 2015, 31 months ago. 

What keeps you up at night?

Literally markets! We trade on both domestic and international exchanges, and China is one of the largest consumers of commodities, so we are monitoring global prices nearly 24 hours a day. Fortunately, we employ technology to alert us of significant market moves, so that we can effectively monitor markets constantly. Overall, we are concerned with the economic impact of a potential trade war, should the U.S. - China trade disputes lead to one.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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