U.S. equities and commodity prices have moved in lockstep recently, but those days are over. Let the great decoupling begin.
- Definitive decoupling triggers
- How the export market will be affected
- Another asset-class bubble coming?
In the past year, currencies everywhere have taken on an inverse relationship to equity prices, relative to what they were doing earlier in the decade. For example, as the dollar has weakened, equity prices have rallied off the floor. In Asia, the yen—traditionally a bearish indicator—is soaring, while markets in Hong Kong, China and other Asian frontier countries have zoomed ahead to record gains.
Some money managers are now forecasting that another relationship is about to get plunked on its head, this time between commodities and equities.
For the most part in 2009, commodities have risen along with everything else, as high commodity-consuming emerging markets have led the way out of a deep recession in the U.S. and Europe. Gold is hitting new highs above $1,000 an ounce, and oil is back in the high end of its 2009 range, around $70 a barrel.
The story for equities is similar. After falling for a bit in late August and early October, the S&P 500 Index is showing gains of 17 percent year-to-date, fueled by massive liquidity provided by central banks earlier in the year.
But with economic uncertainty running high, there are signs that investors are beginning to shy away from U.S. equities in favor of emerging market ones and commodities. Depending on how third-quarter earnings pan out, that process could lead to a massive decoupling between equities and commodities.
Paul Mendelsohn, chief investment strategist at Windham Financial in Virginia, has been taking money out of many of his more profitable trades recently and allocating money toward commodities for this reason.
"I'm focused almost totally on commodities—that's all I'm interested in now," Mendelsohn told HardAssetsInvestor.com. "We've been increasing commodity exposure across the board, particularly in precious metals."
"At some point the market has to decouple from the dollar and say that a decline in the dollar is not good for U.S. stocks. Then there will be a decoupling of commodities and equities," added Mendelsohn.
Among Mendelsohn's largest ETF holdings right now are the SPDR Gold Trust (NYSEArca: GLD) and the Market Vectors Gold Miners Index (NYSEArca: GDX), while his specific company holdings include Chesapeake Energy (NYSE: CHK), Monsanto Company (NYSE: MON) and steelmaker Nucor (NYSE: NUE).
Mendelsohn is not alone in his views. A survey conducted last month by researcher BetaPro found that 60 percent of financial advisers were bullish on natural gas and gold going into the fourth quarter, while 68 percent were bullish on crude and silver. The 300 advisers running more than $20 billion who were surveyed added that while they still favored emerging market equities, U.S. stocks no longer looked attractive.
The case for commodities investing is compounded by the fact that, despite a rally in raw materials and U.S. securities, the latter has outperformed the former this year, even as underlying demand from the BRIC block has grown. That indicates that there is still lots of value among many commodities for the companies that produce them, according to analysts.