Evening Brief – 03.19.24
Two-Edged Sword
U.S. equities are no longer dominating the major asset classes year to date, according to a set of widely followed indexes and exchange-traded funds. As of the end of last week, it’s been commodities.
The WisdomTree Enhanced Commodity Strategy Fund (GCC), which targets a wide range of raw materials, gained 2.9% last week, bringing its year-to-date performance to a healthy 8.1%.
At the same time, the Bloomberg Commodity Index, which tracks 24 commodities, rose for the third week in a row, reaching its highest closing of the year last week. Agriculture has led the commodity gains, with cocoa futures rallying to an all-time high, as well as industrial metals such as copper and silver, and energy, particularly crude oil.
Against that backdrop, the US dollar has weakened significantly since the middle of February, owing primarily to the Federal Reserve’s dovish policy stance since December 2023, when it pivoted and began prepping the market for interest rate cuts this year.
A rally in commodities can be a two-edged sword: higher commodity prices are a sign of demand and economic strength, but often lead to a rise in inflation. Commodities represent close to 38% of the Consumer Price Index. More specifically, energy represents about 7% and food about 13%, calculated by the U.S. Bureau of Labor Statistics.
So far this year, the advance in commodities has outpaced the 7% rise in U.S. equities, when measured against the Vanguard Total U.S. Stock Market Index Fund ETF Shares (VTI), which fell 0.3% last week.
It could be that the Bloomberg Commodity Index and GCC dominance this year is an outlier. However, an analysis of other broadly defined funds reflects this year’s commodity rally. The iShares S&P GSCI Commodity-Indexed Trust (GSG), for example, has outperformed US stocks (VTI) this year.
The fact that some diversified commodities funds are currently outperforming U.S. stocks indicates a shift in commodities’ directional bias. Remember that 2023 was a challenging year for the asset class.
Keep an eye on crude oil, a crucial driver of the new commodities rally, which is up 14.5% this year, through the United States Oil Fund. Agricultural products are also experiencing a bull market in 2024, with the Invesco DB Agriculture Fund (DBA) up 13.4% year to date.
The question is whether the rebound in commodities is the result of mean reversion or a regime change? It’s uncertain whether this is more than just a market realignment, but the odds surely look higher for commodities to reverse a poor performance in 2023.