The idea that commodities will only go up is laughable. One doesn't have to look beyond the last decade to appreciate that.
Same goes for the David Portnoy social media "stonks only go up" ideology that's in part been driving record retail equity speculation. In the 1990s it was taxi drivers and barbers sharing hot stock tips, today it's @stoolpresident Davey Day Trader (David Portnoy) and 20-year-old self-proclaimed YouTube/Reddit/meme stock experts.
After 11 consecutive months of commodity gains, we finally had a negative month in the Auspice Broad Commodity index (the broad comm indexes weren’t all up for 11 months in a row, only ABCERI was). Notably, in the face of a very strong move up in the $USD (a 30% retracement of the 11-month $USD selloff from April 2020), commodities were only slightly negative, with some of the Ag complex still posting gains.
But what is normal? Do stocks always go up? Was the recent 11-month commodity rally an anomaly?
The answer to both is an unequivocal "no". Over the last century both equities and commodities have "mainly" gone up, albeit with periods of flat or even negative performance. Looking back 100 years, the recent "lost decade" in commodities looks like an anomaly, with the only other similar period corresponding with the great depression.
Just as commodities have faced secular and cyclical swings, so too have equities. The recent 10-year return period for equities has been strong, more than 2x the historical average. For millennials whose experience in financial assets has coexisted with the boom of the last decade, it's understandable to think that "stonks only go up". And as traditional value orientated investments have underperformed (until recently), we have seen creative refuge in crypto currencies, SPACs, NFTs, and even trading cards.
The harder it is to apply fundamental valuations, the better an investment has done? No risk there…
But as we can see from history, this isn't exactly normal. The recent 10-year equity returns are amongst the highest in history. And just as commodities have had extended periods of negative returns, so too have equities.
Source: Auspice, https://www.multpl.com/s-p-500-historical-prices/table/by-month
The question is, where do you want to put your money going forward? Most investors today are heavily concentrated in equities with perhaps some bonds and alternatives that more often than not tend to be repackaged equity beta. This in the face of rising yields and record valuations.
Commodities on the other hand are one of the few places you can find value. Moreover, active commodity strategies also tend to have low, or even negative equity correlation.
This past week we heard from US President Biden about "building back better". Massive stimulus and infrastructure is on its way in the US. Concrete, copper, lumber, ... even oil, a critical input for infrastructure (in asphalt for example) is needed, now more than ever. With the US re-entering the Paris Agreement the world is now almost completely united in one of the largest infrastructure transitions in history.
Prior to Covid and the global unification towards greening the economy, it was estimated that the world was facing a $15 trillion infrastructure gap by 2040(1). That gap has now increased significantly, with calls for over $10 trillion in US green infrastructure alone(2). These infrastructure investments will dwarf the estimated $3 trillion in Chinese infrastructure investments in the 2000s(3), largely believed to be a key driver of the previous commodity bull market.
As you consider various investment themes and recent drivers of equity market returns, David Portney and the Reddit rally alike, perhaps consider this:
There is no "build back better" without build".
Commodities are in demand, and will likely continue to be in demand for a long time.
https://www.weforum.org/agenda/2019/04/infrastructure-gap-heres-how-to-solve-it/
NBS, Credit Suisse. https://globalcapital.euromoneycdn.com/v-1eaac0c702f239a015cb2474e1af64b4/Media/images/emerging-markets/Import/516/84516/rapid20gains20in20infrastructure20investments20-20cs.png
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