Gunzberg: Commodities To Upstage Stocks

March 11, 2014

From agriculture to livestock to energy, this is the year of the commodities, S&P Dow Jones’ Jodie Gunzberg says.

Commodities markets have been major underdogs relative to record-breaking U.S. equities for much of the past six years. But the tides are now turning, S&P Dow’s Vice President Jodie Gunzberg says.

Amid supply shocks around the globe, tapering of quantitative easing in the U.S. and a rising-interest-rate outlook, commodities from corn to hogs to oil seem bound to shine in 2014, leaving equities in their shadows, Gunzberg told in a recent interview. You believe commodities will outperform equities this year as the commodity/equity cycle switches over in favor of commodities. Why?

Jodie Gunzberg: Commodities and stocks have had a long relationship of switching off performance because of the underlying cycle of what’s happening in the companies and the goods that they produce. Equities are forward-looking, and now they’ve been ahead of commodities for six years straight. That’s the second-longest stretch of outperformance over commodities since 1980 to 1987.

What happens is that once companies start doing well, and they’re raising capital, and equities are performing well, they then have the resources to spend on commodities to make more products.

That might be where we’re at now, with companies buying more and more commodities to produce their goods. Through February, we’re seeing commodities start to outperform equities. The timing in the cycle might be right for the switch. Is there any historical norm of how long these switches last? How long can we expect commodities to outperform equities?

Gunzberg: There are a lot of different studies that have been done on this. Some studies even go back to the 1800s, and when you’re looking at very long time frames like that, you can get cycles of up to 18 years. It really depends on how the cycles are defined, in terms of what data is used, and back to the 1800s, there is no index data.

With the S&P GSCI and the S&P 500, we only have common data that goes back to 1970. That’s the longest time frame we have. And there are periods of consecutive outperformance, and then there are periods of volatile switching. It looks like there was some volatility before the financial crisis. But post-financial crisis, with this switch, we could see a run where commodities could outperform equities. Aside from companies being able to spend more on supplies, what role do inventories play in this outlook?

Gunzberg: They play an enormous role. The backdrop of the broader macroeconomic picture is that there seems to have been a shift in world growth driven by expansion of supply.

In the early part of 2000s, suppliers were supplying, supplying, supplying, because the prices of commodities were rising. That drives a lot of the production that is behind it. They produced so much that we were faced with a large excess of inventory.

That excess came at the same time we saw a huge drop-off in demand from the global financial crisis. Post-2008, we had large excessive inventory, so suppliers stopped supplying, and now we’re shifting to growth driven by expansion of demand rather than supply. The slowdown in production reduced inventories to a level so low that we’re now vulnerable to supply shocks.

This year’s issues with the weather are really impacting commodities across the board because of that. Now, every time something happens, like the cold weather, or the political tensions in Ukraine, the drought in Brazil, these kinds of things are really driving commodities, and generally in a positive direction.


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