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Don't Look Now But Commodities have been Outperforming Stocks

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June 7, 2016
Commodities outperform the stock market as agriculture and energy show improved financials.

The stock market has whipped back and forth this year driven in part by concerns about the Chinese economy and global economic health in general. Additional volatility is coming from frequent shifts in perceptions about when the Federal Reserve might hike interest rates. But while the broader stock market has whipped back and forth, the commodities sector has been busy outperforming. 

In fact, commodities are now outperforming the broader market for the first time since 2007, says Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices. 

Let’s take a look at the numbers. The S&P 500 posted a 3.22% year-to-date gain though June 6, while the S&P GSCI Index, a widely watched commodity index, posted a 10.69% year-to-date gain. Looking at action over the last three months, the S&P GSCI posted a three-month gain of 18.1% through the end of May, handily outperforming the S&P 500. 

"If this outperformance holds through the year, it will break the longest number of consecutive years that stocks outperformed commodities. Following the last time stocks outperformed commodities for near as long in 1980-86, seven consecutive years, commodities returned almost 300% through 1990 when the trend reversed," Gunzberg says. 

Ags and Energy Inflating

Looking within the commodity sector, "Agricultural commodities have been performing strong, including soybeans, corn, and bean meal. This strong performance was related to weather and a bit of foreign demand. And, crude oil has been on a strong run and is threatening the $50 level," says JJ Kinahan, chief market strategist at TD Ameritrade. For more on crude oil, read Crude Oil at $50: 5 Things Investors Need To Know

What could this mean for the stock market, economy, and the Fed? According to Kinahan, it boils down to inflation. "The fastest way to see an increase in inflation is through food prices and energy costs," Kinahan notes. The Federal Reserve has been scouring economic data in recent months looking for signs of a pick-up in inflation, which year-to-date has sagged below the central bank's 2% target. Rising commodities could translate into higher inflation, which could give the Fed the confidence to move forward with rate hikes this year. 

Tipping the Supply-Demand Balance

Changes in commodity prices generally come down to supply and demand. "Over the last three years, there’s been too much supply and too little demand for commodities around the globe," says Sam Stovall, managing director at S&P Global Market Intelligence. That might be changing. 

"We've had a curtailment of oil output and seen oil bottom at $25 and come up to $50. That has been led by a reduction in supply," Stovall says. 

"There’s a positive correlation between the S&P 500 index and commodities. Traditionally, commodities do well late in the stock market cycle," says Stovall. He adds that stock sectors with the highest correlation to commodities include energy and materials. He points out that these sectors in the past tended to outperform the broader stock market when the economy has been growing for a couple of years. 

The energy and materials sectors have been leaders in 2016, with a 10.2% and 9.1% gain, respectively, through June 3. 

Stock investors looking to capitalize on the rising commodity trend could consider "owning investments with exposure to sectors or stocks that have a higher correlation to commodities," Stovall said. 

FIGURE 1: FUTURES WATCH LIST.

TD Ameritrade clients can monitor commodity futures, along with other futures contracts, through the futures watch list. To find this list, log in to thinkorswim and click MarketWatch > Quotes. Click the menu below Quotes and point to Public (A – N) and then click Futures. Data source: CME. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

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