Stocks and commodities have historically moved in opposite directions. Each asset class typically has a 16-18 year bull market followed by an equally long bear market. Barry Bannister at Nicolaus & Co has studied commodity and stock market cycles and confirmed these correlations.
Just being aware of these cycle patterns and understanding where in the cycle you are will give great insight. The smart investors will buy into these long bull market cycles early and ride them out until the end. There is a lot of money for contrarian investors to be had as the price of assets rise during a bull market cycle. Even a novice investor can look like a genius by buying into a secular bull market early.
You donât have to be a genius to make money in a bull market. Simply buying an index can give you great return in bull market cycle. More ambitious investors can make extraordinary returns by speculating in specific commodities or stocks during a bull market cycle.
The chart below shows relative price strength, of stocks vs. commodities, for the last 140 years. As you can see the result is remarkably consistent with a bull market in stocks and commodities taking turns every 16-18 years on average.
Chart prepared by Barry Bannister for Nicolaus & Co.
Source: Stock market prices are from the Cowles Commission study ordered by Standard & Poors, combined with the S&P 500 post-1960. For Commodities, 1793 to 1890 are the Warren & Pearson U.S. commodity average. 1891 to 1913 is the WPI from the BLS and other agencies. 1914 to present is the PPI for All Commodities modern series, about two-thirds of which we feel are classic commodities. Separately, note that Prof. Gary Gorton of the Wharton School and Prof. K. Geert Rouwenhorst of Yale University demonstrated that rolling commodity futures have out-performed stocks for the post-1959 period, improving investor returns on the efficient frontier, as we interpret it, in âFacts and Fantasies About Commodity Futures,â Yale, 2005.
1906 â 1923. The commodity bull market began just before the stock market crash of 1907. The commodity bull market lasted until after WWI.
1929 â 1949. In 1929 the stock market crashed. The stock market went from DOW 380 in 1929 to DOW 40 in 1932. A 90% drop in price. During this time commodities were in a bull market and stocks were in a bear market. The bull market in commodities only intensified during World War II. Commodities were in short supply and prices went through the roof.
1950 â 1965. World War II was over and the depression had ended. Commodities were plentiful, as they were no longer needed in the war effort, and the economy was on fire. It led to a secular bull market in stocks that lasted for 15 years.
1966 â 1982. During this bear market in stocks the DOW went nowhere for 16 years. The market lost 22% in price during this period. However, the decline in the market was much larger if you factor in inflation. The CPI index went from 95.4 to 308.6, increasing by 203%. Interest rates went up to double digits and commodities boomed. Stocks had been stagnate throughout the late sixties, and all of the seventies with the exception of a few bear marker rallyâs 1967-1968, 1970-1973, 1974, 1976, and 1980. By 1979 business week had printed âEquities are deadâ on their cover page. Not many investors wanted to touch stocks. By the time the bear market ended in 1982 stocks had become dirt cheap.
1982 â 2000. The cycle repeated again. Former Fed chairman Paul Volker had just stepped in and end inflation with high double digit interest rates which caused a sever but short recession and laid the foundation for economic growth. By 1982 stocks were dirt cheap and as the economy took off an 18 year secular bull market in stocks was created. It ended with a .com mania and a crash in 2000.
2000 â And underway. The new commodity bull market starts. During year 2000 shortages of commodities started developing as China, India, and the other emerging markets started using more and more of them. We donât know when this commodities bull market will end but it will probably be around 2016-2018. By the end of the commodity bull market commodities will no longer be in shortage and the bull market will come to an end.
From a Birdseye view this chart looks very consistent and predictable. It is almost as God was playing the market and switching between stocks and commodities every 16-18 years. Use this knowledge to your advantage and invest in the current bull market.