While the stock market may be the biggest beneficiary of the enormous sums of money that governments around the world have pumped into their economies, another asset class is riding the reflation trade as well—commodities.
Left for dead by investors, many commodities have surprised to the upside. Several are higher—in some cases, much higher—than where they were before the coronavirus pandemic struck.
It’s an interesting phenomenon considering most economies are still operating below their peaks, but one that makes sense in the context of a roaring bull market in financial markets across the board. Indeed, even though commodities are used in the real world, their movements are often influenced by trading activity on electronic exchanges, particularly futures markets.
This is not to say that real-world fundamentals aren’t playing a part in the rally as well. Thanks to early stringent lockdown measures, China, the largest consumer of commodities, is back to growing at pre-virus rates. The world’s second-largest economy grew by 6.5% year over year in the fourth quarter, the fastest pace since 2018.
Stronger economic growth boosts commodities, and similarly, any stimulus that turbocharges demand helps the group. That’s the case even if the stimulus causes inflation. While equities may be wary that inflation will provoke central banks into hiking interest rates, commodities live in the here and now. An overheated economy isn’t an obstacle for the asset class in the short term, it’s a boon.
Commodities also benefit from a sliding dollar, which makes USD-denominated commodities cheaper for overseas buyers, lifting demand on the margin.
Of course, commodities are a disparate group, with separate supply and demand fundamentals for each. That said, most of the major ones are heading in the same direction right now—higher. The largest broad commodities ETF, the $3.1 billion Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), is up 20% over the past six months, similar to the 19.4% gain in the S&P 500 over the same time period.
6-Month Returns For PDBC & SPY
That’s solid, but within PDBC’s portfolio, certain individual commodities are sporting much higher returns. Take the agricultural complex; corn, soybeans and wheat have surged to levels not seen since 2014 due to strong Chinese demand and poor weather conditions in South American growing regions.
OPEC Supports Oil
Meanwhile, oil, one of the worst-performing assets last spring, has made a respectable comeback over the past several months. Both primary oil benchmarks—WTI and Brent—were last trading in the mid-$50/barrel range, levels last seen in February 2020.
An uneasy alliance between the OPEC countries, Russia and others have lent support to prices while demand slowly recovered. The group’s output still remains millions of barrels per day below prepandemic levels, leaving the oil supply/demand balance in a slight deficit, according to analysts.
That’s supportive of prices—for now. But should prices continue to rise, OPEC and its allies will surely open their oil taps wider, bringing millions of barrels of more supply onto the market.
Multiyear High For Metals
Earlier I mentioned that the agricultural commodities were hitting multiyear highs. They’re not the only ones doing so.
Many of the metals are at prices not seen in at least a few years. Copper is at an eight-year high; nickel is at its highest point since 2014; and silver is close to its best level since 2013.
These industrial metals have been beneficiaries of the strength in the goods-producing side of the global economy, which has flourished at the same time the services side has struggled amid social distancing.
All three of the metals are used extensively in manufacturing and construction. Over the past six months, the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) is up 36.2%; the iShares Silver Trust (SLV) has gained 29.6%; and the United States Copper Index Fund (CPER) returned 23.7%.
Signs Of Life
Commodities may not be back to their high-flying days of a decade ago, but they are showing signs of life. With central banks committed to bolstering growth, and in some cases, letting inflation run a little hot, this might be an asset class that starts to attract some attention.