I mentioned this in the 2020 Outlook that I posted a few years ago but it is becoming more relevant in the current environment and well worth considering again.
One measure of the relative value of assets (when looking for warning signs or opportunities) is the value of Stocks vs commodities. A simple and important calculation is the S&P index divided by the Bloomberg Commodity Index (BCOM). It shows the valuation of companies compared to the commodities that many rely on to generate their profits.
For historic perspective, the S&P was 17.3 times the BCOM index when the Dot Com bubble burst in January of 2000. On the other hand, when commodities peaked in June of 2008, the S&P was only 5.5 times the BCOM index. The S&P notched a new record high on Jan 4th over 4800 with the BCOM index slightly over 100. At a value of 48 times, it is clear why this is important to pay attention to.
With interest rates rising in the very near future and central banks planning on removing some of the liquidity that helped push stocks higher, there are signs that a decline in the SP could be one way the situation corrects.
More importantly to us, the other is commodities could gain significant value vs stocks. One only has to look at the energy sector for leadership. You can’t have the insanity of the world trying to convince capital markets to quite funding the fossil fuel industry without meaningful impacts. All of the green efforts will have one certain result – higher fuel costs. That will in turn help grain and oilseed demand at a time when droughts may become more common and severe. Meats and metals have bullish stories of their own, leaving it easy to see why Goldman Sachs is calling for a commodity super-cycle lasting the next decade.
As I’ve mentioned in the past, in NO way is this a suggestion that one becomes complacent. Much the opposite. High values come with high volatility, increased opportunities and risk. This is for long term planning purposes only.
One measure of the relative value of assets (when looking for warning signs or opportunities) is the value of Stocks vs commodities. A simple and important calculation is the S&P index divided by the Bloomberg Commodity Index (BCOM). It shows the valuation of companies compared to the commodities that many rely on to generate their profits.
For historic perspective, the S&P was 17.3 times the BCOM index when the Dot Com bubble burst in January of 2000. On the other hand, when commodities peaked in June of 2008, the S&P was only 5.5 times the BCOM index. The S&P notched a new record high on Jan 4th over 4800 with the BCOM index slightly over 100. At a value of 48 times, it is clear why this is important to pay attention to.
With interest rates rising in the very near future and central banks planning on removing some of the liquidity that helped push stocks higher, there are signs that a decline in the SP could be one way the situation corrects.
More importantly to us, the other is commodities could gain significant value vs stocks. One only has to look at the energy sector for leadership. You can’t have the insanity of the world trying to convince capital markets to quite funding the fossil fuel industry without meaningful impacts. All of the green efforts will have one certain result – higher fuel costs. That will in turn help grain and oilseed demand at a time when droughts may become more common and severe. Meats and metals have bullish stories of their own, leaving it easy to see why Goldman Sachs is calling for a commodity super-cycle lasting the next decade.
As I’ve mentioned in the past, in NO way is this a suggestion that one becomes complacent. Much the opposite. High values come with high volatility, increased opportunities and risk. This is for long term planning purposes only.
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