Demand Shocks: Selloffs Should be Bought not Sold!!!

Commodities tend to follow a similar pattern when confronted with sudden and unexpected demand shocks. Prices generally react quickly as investors and participants try to assess short and long-term effects. These sharp corrections in prices tend to overshoot to the downside, consolidate for 2 or 3 months, and subsequently exhibit strong multi-month recoveries from the bottoms in prices. We examined how commodities, using the Rogers International Commodity Index® (“RICI®”), reacted to both the SARS epidemic when it broke as well as the much deeper demand shock caused by the tragic 9/11 attacks. In both cases, there were very sharp declines which ended within a few months and represented excellent buying opportunities for investors.

Coronavirus Demand Shock:

After a broad and healthy rise of approximately +11% in 2019 (calendar-2019-in-review), commodities started 2020 on a mildly positive note in the first few trading days. The RICI® peaked on January 6th up 1.25% before beginning a sharp correction due to the recognition of the spreading of the Coronavirus and the immediate reactions to contain it.  Energy was the first to react, peaking on January 3rd, while metals and agriculture both peaked in the 3rd week of the month. The sharp month-long correction brought the RICI® down approximately -10% from its high on January 5th to the recent low on February 3rd when all 3 sectors bottomed. The RICI® has rallied back a a few percentage points since then leaving it down -5.1% YTD as of February 19th.

Clearly, the response to the virus has led to a sudden slowdown in China’s economic activity including a sharp drop in the demand for oil as the country battles to limit the spreading. Additionally, the impact will certainly be felt globally as market participants attempt to gage the near-term demand shock on various commodities as well as trying to assess the severity of the virus and potential long-term effects on economies overall. Time will tell if the recent sharp 10% correction has already fully discounted the impact of the virus or not. Historically, these sharp demand shock-driven declines are over relatively quick, followed by a period of consolidation and a minor new low;  providing investors excellent entry points. Below, we look at both the SARS and 9/11 demand shocks and how commodities performed during those periods.

The first incident of SARS occurred in November of 2002 although it was only identified as such months later. It was in mid-February of 2003 that the outbreak in Guangdong Province, China became widely known and commodity prices began to react. By mid-March, cases had been reported in Hong Kong, Vietnam, Taiwan, Canada, Singapore and Thailand. The responses, including travel restrictions and advisories, caused an immediate demand shock.   Commodities, which had been rising throughout 2002 and into early 2003, reacted sharply to the SARS epidemic. As indicated in the above graph, the RICI® peaked in early 2003 and began a sharp SARS-related sell-off that eventually made a final low almost two months later on April 29, 2003;  a decline of -13.23% peak to trough. Most importantly, despite the ongoing effects from SARS through out the summer, commodities began to rally in May and had fully recovered from the demand shock sell-off by the end of August 2003; a rally of +18.73% in 4 months! Furthermore, the RICI® went on from that level to rise an additional +39.02% over the subsequent 9 months!

The graph above shows how commodity prices reacted to the 9/11 attacks. There was a very severe demand shock globally and probably most acute in the US, the largest consumer of commodities. There was a significant and immediate decline in commodity prices which reached a final low two months later on November 15, 2001 with a total decline of -17% from the closing level on the day prior to the attacks. Despite the fact that normal economic activity was slow to resume and the US economy was headed into a recession, commodity prices began to recover from that low in November and the RICI® went on to reach a full recovery on April 2, 2002; a rally of 22% in approximately 4 ½ months! In fact, nine months after first reaching that recovery level, the RICI® appreciated an additional 13.89%.


The Coronavirus has caused a sudden and unexpected demand shock causing a broad and sharp correction to commodity prices. Historically, these types of declines create excellent tactical entry points for investors. The SARS induced correction and the 9/11 attacks are two such examples. We believe the current correction that has just occurred offers investors a similar excellent opportunity.



A Global Demand-Based Portfolio

The RICI® is a composite, US dollar-based, total return index methodology. It represents the value of a basket of commodities consumed in the global economy, ranging from Agricultural to Energy and Metal products. The Index’s weights attempt to balance consumption patterns worldwide (in developed and developing countries) and specific contract liquidity. The value of this basket is tracked via futures contracts on 38 different exchange-traded physical commodities, quoted in four different currencies, listed on nine exchanges in four countries.

(To access additional management commentaries & reports please visit our web site for Financial Advisors and Institutions by clicking here. For further insights visit our Commodity Curve Blog.)

DISCLAIMER: The index returns shown above do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance or provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any index performance provided is for illustrative purposes only. The time period selected represents the inception date of the Rogers International Commodity Index® and is intended to provide a historical long-term average. Data provided by Bloomberg LP, BarclayMAP, and RBC Wealth Management. Past performance is not indicative of future performance.
Alan Konn

Partner & Managing Director of Price Asset Management