Breadth Thrusts & Bread Crusts: Is it different this time?

JC Parets
May 19, 2022

From the desk of Willie Delwiche.

“It isn’t even a bear market yet.” 

I heard that from someone earlier this week. I also read it somewhere else earlier today. 

I know what they mean, but the comment left me shaking my head anyway. 

Many are reluctant to call a bear a bear until the pullback exceeds 20%. I wrote about the shortcomings with this approach a few weeks ago. But old habits die hard. For now, with the S&P 500 down “only” 18% from its January peak, this current period is still being labeled a correction.

Not only are they calling it a correction but a normal one, at that. It’s routine – something that happens all the time. If the current pullback stops shy of the 20% threshold (a dubious proposition from where I sit), it will be the tenth decline between 10% and 20% the S&P 500 has experienced in the past quarter century.

Yet for investors, this environment has been as abnormal as they come. Looking at the past 25 years, when the S&P 500 has been down like it is this year, bonds are typically higher (helping buoy the portfolio experience for investors) and commodities have typically been lower. 

This year is the opposite. Bonds have plummeted (falling nearly 10% so far this year) and commodities have soared (currently up more than 30% so far in 2022). 

As dangerous as it sounds, maybe this time really is different.  

Whether you see this situation as truly different probably boils down to your experience and perspective. If you didn’t live through (or study) past periods of high inflation, a positive correlation between stocks and bonds doesn’t make much sense. If you came to the market in the past decade, commodities moving higher versus stocks is an out of context event. 

The reality is bigger than the lens through which we take the picture, and more nuanced than the talking point we recite. 

Consider the relationship between stocks and bonds. When we zoom out, we see a consistent pattern of alternating leadership. There are times when commodities are stronger than stocks, and there are periods (like the one we are just coming out of) when stocks are stronger than commodities. This is another example of requiring an understanding of the environment in which we find ourselves if we are going to operate effectively. The strength in commodities so far in 2022 builds on the strength we saw in 2021, and suggests we could be in the beginning of another sustained period of commodities outperforming stocks.

The market will test that thesis. One test will be how commodities perform over the next few months. Our cycle work suggests that from now until mid-summer, commodities could come under pressure. How they respond to those seasonal headwinds and how they respond to seasonal tailwinds that in the second half of the year will help clarify the environment and give us information that we can put to use.

Every experience is unique. But patterns repeat. 

Every time is different. But the past provides context. 

The more aware we are of the past, the better our perspective and the more able we are to operate in the present.

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