Stocks and Commodities Rise in Tandem
With the first half of the year ending, it’s a good time to study the relative performances of the various asset classes. Commodities and stocks were the two biggest gainers during the first half of 2014 with commodities outperforming. The CRB Index gained 10% during the first six months of the year, versus a 6% gain in the S&P 500.
The two assets classes have been rising in tandem since the beginning of 2003. Stocks and commodities fell between 2000 and 2002 during a bear market and recession. They rose together between 2003 and 2007. Stocks peaked in 2007 and commodities in 2008. Both fell sharply during the second half of 2008 during another bear market and recession. They bottomed together during 2009 and rose together until 2011 when they started to diverge.
Stocks rose between 2011 and 2013 as commodities dropped. During 2014, however, commodities have started to rise. The fact that commodities are starting to rally during 2014 carries good news for both. Rising commodity prices are early indicators of inflation. That’s usually good for stocks and the economy since it allows for greater pricing power and implies growing economic strength. Commodity strength also carries good news for stocks tied to commodities.
Energy and material stocks gained 14% and 7% respectively to outpace the S&P 500 gain of 6%. That trend is likely to continue as long as commodity prices keep rising. Rising foreign currencies are also positive for commodity assets. Another side effect of rising commodities is that it boosts foreign markets that produce commodities, like Australia and Canada. Their currencies also get an added boost when rising commodity prices are combined with a weaker dollar. The Dollar Index lost -0.26% during the first half of the year. Two of the strongest currencies have been tied to commodities.
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