Recently, we’ve been looking at the stock market and asking ourselves, Is this the top? While there is no way to know for sure, there are some things going on that have historically signaled a market peak.
This leaves many investors wondering what to do. If the market is heading down, where should I put my money? Does everything go down when the market goes down? Are there any alternatives to the stock market? Like most investors, you probably want to protect your hard-earned money and are looking for options.
How Commodities Are Used In Investing
One option you may want to consider is commodities. Commodities are raw materials. They can either be consumed directly like food or used to manufacture or create other products. Different types of commodities include natural resources, such as agricultural products and timber, energy sources like oil and gas, and precious metals like platinum and gold.
There are several ways to include commodities in your portfolio. You can buy physical raw commodities directly, invest in exchange-traded products that track a commodity index, or purchase futures contracts. You can also purchase commodity-related stock mutual funds, but they don’t always deliver the same returns as other commodity investments. It all depends on their investment strategy.
A Historical Look At Commodities
Throughout history, there has been an inverse relationship between the total return of the S&P 500 and the S&P Goldman Sachs Commodity Index, which represents the commodity market as a whole. In looking at the business cycle through the years, the end of the cycle is when commodities have really outshone the other asset classes. The last push of the business cycle when there is a lot of leverage in the system and a lot of credit, which has really been a boon to commodities.
In the 1970’s and 1990’s, commodity prices relative to stock prices bottomed out just before the cycles turned downward. They served as a sign of the coming downturn and were the ones going up while most other asset classes were going down. The chart below shows how equities have compared to commodities throughout history.
Where We Are Now
In looking at the chart, you can see that commodity prices are near historic lows, especially relative to stock prices. For most of the 2010’s, commodities were headed downward, but they have risen 17% since January 2016. That’s nothing compared to the stock market, but it brings them safely out of their previous bear market.
The future looks bright for commodities. Global economic activity is increasing, which is a big driver of commodity prices. In 2017, US GDP saw three consecutive quarters of over 3% growth, and the Eurozone surpassed that for much of the year. Even Japan’s growth has gone above 2% and has experienced two years of sustained growth each quarter. For the first time since before the financial crisis, all of the major global economies are strong and growing.
In addition to global growth, commodities will benefit from the tax cuts going into effect this year, the weak US dollar, and the European Central Bank’s stimulus policies for the eurozone. Oil, in particular, looks promising, as demand is increasing and there have been some production problems.
When you look at the chart above, you can see that commodity prices are just as cheap relative to stocks as they were at historical turning points in previous cycles. Right now values are where you want them to be to buy. Going into 2018 at the end of a business cycle, many analysts believe that commodities have the potential to be one of the best investment vehicles available. This may be the perfect opportunity to “buy low” so that you can “sell high” later on down the road.
What You Should Do
That doesn’t mean you should go cash out your entire portfolio to invest in commodities. They are highly volatile and should only be included as a part of a well-balanced portfolio. As with all investments, there is risk involved, so it is best to work with an experienced professional with a successful track record.
At HBA Wealth, we have a team of highly trained experts who want to see you succeed in accomplishing your financial goals. If you think commodities might make a wise addition to your portfolio or if you just have more questions about them, we can help you. Give us a call at (626) 529-8347 or email me directly at ricky@hbawealth.com and together we can look at how commodities might fit into your portfolio and your greater financial strategy as a whole.
About Haydel, Biel & Associates
Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.