From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
In April 2020, crude oil traded below zero and marked the perfect capitulation event for a number of trends.
Around the very same time, both commodities and stocks bottomed and kicked off major rallies.
Until recently, commodities had underperformed stocks for about a decade. To make matters worse, they were moving lower on an absolute basis for most of that time as well.
Not only have commodities started to trend higher on an absolute basis again. They're also undergoing a reversal in their relative trend with stocks and other alternatives.
We’ve been clear about our bullish position as we’ve discussed the potential for a new commodity supercycle for over a year.
Now, we want to take that thesis one step further as the evidence is building in favor of commodities experiencing a sustained period of outperformance relative to stocks.
To best take advantage of this trend, we want to be overweight commodities and commodity-related stocks.
Let’s dive in and take a look at some asset allocation ratios in order to illustrate what is taking place among the various asset classes.
First up, here’s the S&P 500 relative to the cap-weighted CRB Commodity Index:
The ratio is at fresh two-year lows, which means commodities have been outperforming for some time already. And the trend is showing no signs of slowing, as we’ve only seen an acceleration in downside momentum in recent months.
The evidence suggests a structural trend reversal is underway in favor of this long-forgotten asset class.
The price action on an absolute basis is also supportive of a reversal in the relative trend as these asset classes have started to take diverging paths.
Last year, stocks were moving higher -- they were just doing so at a slower pace than commodities. But that is no longer the case. Today, commodities are still making new highs, but the majority of the stock market outside of energy is struggling.
Now let’s check in on how commodities are doing relative to a safe-haven alternative. Here’s the commodities versus Treasury bonds ratio:
New six-year highs and a multi-year base breakout suggest a reversal in the relative trend is taking place for commodities against bonds as well.
And, just like the stock market, we’re also seeing confirmation of this from the absolute price trends. While commodities were the top-performing asset class in 2021, bonds were the worst:
As you can see, commodities posted a 42% return and far outpaced the performance of both stocks and bonds.
Despite this relative strength, money continues to flow into stocks with little investor interest for commodities. In fact, commodity ETFs experienced net outflows in 2021.
Evidence like this makes us believe we are still in the very early innings of this theme.
And here’s a look at 2022:
Commodities have kicked off the new year with a big lead once again!
The main difference from last year is that commodities are moving higher by themselves so far in 2022. They're already up 10% on the year, while stocks and bonds have both been moving lower.
The takeaway from all this is that it is time to be overweight commodities as evidence is stacking up to suggest that they’re in for a sustained period of leadership.
This has been our position, and it will remain the case as long as the relative trend reversals we just discussed are intact.
With the uptrend for stocks coming under pressure of late, it’s important that we listen to the message of the market and put more capital toward what’s working -- and that's commodities.
We also want to get used to being invested this way as this trend is likely to persist for longer than most are prepared for.
