Bloomberg Intelligence May 1, 2018
This analysis is by Bloomberg Intelligence analyst Mike McGlone from the Bloomberg Commodity Outlook.
Early Recovery From Extreme Loss of Faith Favors Commodities
Commodities appear to be in an early stage recovery from what could prove to be a major bottom for the asset class. Less than three years into a bull market vs. a decade-long run for stocks tilts relative value toward physical commodities as inflation and global GDP sustain recoveries.
Historically Depressed Commodities Vs. Stock
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Reversion May Be Severe in Commodities vs. Stocks. There's little historical precedent for mean reversion in inflation, the dollar and depressed commodities vs. the extended stock market. The last time the Consumer Price Index bottomed from 2016's similar extreme (vs. its 60- month average) was 1956. Similarly for the tradeweighted broad dollar, the year-ago peak almost matched the 2002 high. CPI is speeding toward a 6% premium since 1995 vs. its five-year mean, and the ratio of commodities vs. stocks is at a high risk of following.
The primary risk is the stock market enters a period of underperformance following the outperformance. With S&P 500 total return unchanged, the Bloomberg Commodity Index Total Return would need to increase more than 200% to match the mean in the ratio between the indexes since 1995 and 2012's level.
Commodity Recovery in Early Days vs. Stocks
Favorable demand vs. supply conditions compared with a recovering CBOE SPX Volatility Index (VIX) should continue to support commodities over stocks and bonds.
Up about 3% in 2018 vs. the slightly lower S&P 500, the Bloomberg Commodity Spot Index recovery has the upper hand. Over a decade ago, similar conditions in these key gauges marked the foundation of significant commodity outperformance vs. stocks, though the financial crisis distorted returns. A shift favoring commodities appears underway.
Lowly Commodities Gaining Favor vs. Stocks
It's been since 2007-08 that we've seen the sectorweighted average of commodity-index demand vs. supply hold near similarly elevated levels, while 2006-07 was the most recent period the VIX sustained near the lows reached in 2017. Stock-market mean reversion is unlikely to be as severe this time, but may bear a resemblance.
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