In March 2022, the Federal Reserve (FED) started to hike interest rates in the United States banking system through open market operations that increase federal funds rates. These hikes have barely stopped ever since, creating a high interest rate economic scenario, and demanding investors to adjust accordingly.
It is noteworthy that the market has not seen these increased interest rates superior to 5% since mid-2007, mostly navigating with low federal funds rates in the last 15 years, with a brief exception from 2016 to early 2020, when the FED drove its rates to as high as 2.44%. This data is from MacroTrends.net.
Interestingly, certain types of financial assets will perform well in lowering interest rate environments, such as the stock market or Bitcoin (BTC) — since 2009 — but could find challenges when facing higher interest rates worldwide.
Picks for you
On the other hand, some assets have historically been proven as interesting ways to hedge these increased federal funds rates. In this context, Finbold turned to the ChatGPT artificial intelligence (AI) tool, to gather insights on top picks for investors in these challenging and even “ most dangerous times,” according to JPMorgan’s CEO.
ChatGPT investments in an increased interest rates environment
For this experiment, Finbold asked the ChatGPT-4 on October 14, the most advanced version of OpenAI’s flagship product, to pretend it was “an investment expert consulting for a finance media outlet.” We then asked the AI to:
“Recommend 3 assets investors would benefit from buying in October 2023, in a high interest rates environment, to hedge against the Federal Reserve’s decisions to continuously hike interest rates.”
— Prompt by Finbold
On what the ChatGPT disclaimed that the following suggestions are “general propositions and may not suit particular investor needs.” It also stated that: “Investment decisions must be based on comprehensive financial analysis, understanding of individual financial situation, risk appetite, and investment objectives.”
Nevertheless, the AI would pick Treasury Inflation-Protected Securities (TIPS), Gold (XAU), and Real Estate Investment Trusts (REITs), as its core strategy to hedge against increased interest rates by the FED.
Treasury Inflation-Protected Securities (TIPS)
“TIPS are bonds issued by the U.S. government that are indexed to inflation. When interest rates rise, so does inflation, and TIPS are a good hedge against this. The principal of TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.”
— ChatGPT-4
Gold (XAU)
“Gold is a traditional safe-haven asset that investors turn to during times of market instability, and it typically holds its value well in high-interest-rate environments. The precious metal is used as an effective hedge against inflation because, in the long term, its price movements tend to be inversely related to real interest rates (i.e. nominal interest rate minus inflation).”
— ChatGPT-4
Real Estate Investment Trusts (REITs)
“While real estate may decline in high interest rates environment due to increasing borrowing costs, certain REITs might still perform well. Those focused on sectors like commercial real estate, which often have long-term lease agreements with rent escalations linked to inflation, may be less sensitive to interest rate hikes. Moreover, some REITs might remain attractive by offering high dividend yields that could more than offset the impact of rising interest rates.”
— ChatGPT-4
It is important to say that, despite ChatGPT’s pick on TIPS due to a historical correlation of increased interest rates with inflation, this is understated as a false cause fallacy, because interest rates usually hike as an attempt to lower inflation indexes such as the CPI.
This means that inflation will usually increase first before the federal funds rate follows. Notably, the same logic could also be applied to the other picks.
Read also:
- 5 Office REITs to Invest
- 5 High Dividend REITs to Invest
- 5 Data Center REITs to Invest
- 5 Apartment REITs to Invest
- Top 3 Self Storage REITs to Consider
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk
