As of 12/6/16, Commodities continue to outperform U.S. Equites year-to-date with the Rogers International Commodity Index® methodology (RICI®) up 13.06% versus the S&P 500 which was up 10.48%.
After one of the longest and deepest bear market periods for the commodity asset class, it is not surprising that reversion to the mean now appears to be taking hold. Massive capital expenditures have constrained suppliers across the mining and energy industries. Credit has tightened significantly for over-leveraged suppliers leading to the closing of marginal capacity. While demand has remained consistent, this tightening of supplies has led to the beginning of rising prices across numerous commodities. Yet prices on average remain significantly below their levels even from a few years ago.
The change in administration has added three new components to the equation. First and foremost, the new administration is proposing a multi-year investment in infrastructure that may result in up to $1 trillion in spending. Globally, there is a growing need for infrastructure which could be a strong source of demand for many raw materials as quantitative easing gives way to this type of fiscal stimulus. On a global macro level, the U.S. Bond market has reacted with a sudden and strong move up in interest rates as well as growing expectations of inflation finally beginning to trend up in earnest. These are all positive trends for the Commodity asset class and adds to its potential value as an important diversifier and total return investment.
As investors and advisors reassess their asset allocations for 2017 and beyond, the Commodity asset class is poised to garner renewed interest, and deservedly so.
The following table provides a history of the performance of Stocks and Commodities on a year-by-year basis from 1970 (through 11/30/16). It provides some perspective on where each of the asset classes are in respect to the current cycle.
Alan Konn | Managing Director