Are Commodities Back En Vogue?

Commodities prices have been trending lower since early 2011, but the most dramatic move lower has come since mid-2014.  In fact, since June 30, 2014, the PowerShares DB Commodity Index (DBC), which is an exchange-traded fund (ETF) that tracks 14 of the most heavily traded and important physical commodities in the world, has dropped over 41%.  This is a very dramatic move which would normally be associated with a recession or dramatic deceleration in economic growth.  It is also fairly surprising that during the same time frame, the S&P 500 index was able to overcome the crash in commodity prices and actually post a gain of a little over 1%.  Given the dramatic variance between the  performances of the S&P 500 and the DBC, we thought it warranted a closer look at the individual industry sector performance within the S&P 500.

Unknown 11.32.57 AMSource: Bloomberg.  Returns exclude dividends.

The first thing we discovered was fairly obvious: the industry sectors that are heavily dependent on commodity prices were also the largest drag on the S&P 500 at large.  The Energy, Materials, and Industrials sectors are down 32.2%, 13.7%, and 3.3%, respectively, since June 30, 2014.  No surprise.  What was more interesting to see, though, was which sectors were strong enough to fully offset the drag created by the commodity-dependent sectors.  Four industry sectors are responsible: Consumer Discretionary (+14.7%), Health Care (+9.9%), Information Technology (+8.9%), and Consumer Staples (+8.5%).  Intuitively, this makes some sense.  If the consumer has to spend less money on energy and other commodities, she will have more money left over to spend on consumer goods and services.  Some of these benefits are offset by job losses in the energy/materials sectors and the consumer’s unwillingness to spend the gas savings, but clearly the net effect should be positive for consumer spending.


Unknown-1 11.32.57 AMSource: Bloomberg.  Returns exclude dividends.

One final note.  You will notice from the chart above that the commodity-dependent sectors within the S&P 500 have staged a fairly impressive bounce in recent days.  Since September 28, the Industrials, Energy and Materials sectors have bounced 7%, 12% and 11%, respectively, on just a 4% bounce in the DBC.  These types of moves should not be unexpected for markets that have been so badly beaten down.  And though we would not go so far as to call the rebound a “dead cat bounce”, there aren’t too many fundamental reasons to expect a sustainable and significant rally in the commodity markets right now.  It is true that recent economic data, including a very poor September employment report, have reduced the chances for a Fed rate hike this year.  And because the Fed is less likely to hike, the recent upward pressure on the dollar – one of the causes for plummeting commodity prices – should subside.   However, the majority of the pullback in commodity prices is related to slowing global economic growth, most significantly in China.  Until the global growth outlook stabilizes, it’s hard to expect much more than temporary spikes in commodity prices.