Why commodities and stocks have been the top-performing assets? Wells Fargo weighs in
(Kitco News) Commodities and stocks have been the two top-performing asset classes over the past year. Wells Fargo points to the "real connection" in what is usually an inverse relationship between the two asset classes.
The traditional relationship between commodities and stocks is when the latter rally, the former retreat, and vice versa. But this has not been the case over the past year, as both saw massive rallies.
"Some see this as a reasonable and regular connection, the thought being that stocks and commodities have the most to gain as the global economy perks up. We agree that there can be an economic connection here, but it typically has only lasted for a short time," said Wells Fargo's head of Real Asset Strategy John LaForge. "Over the long term, commodities and stocks have often run in different directions."
Wells Fargo releases a chart showing the historical relationship between commodities and stocks.
The conclusion was — "when stocks have been in a bear market, commodities have often – but not always – been in a bull market," according to LaForge.
This is the reason why long-term investors prefer to own commodities, with many viewing the asset class as a hedge against stock market volatility.
"Commodities … have tended to be negatively correlated with stock markets over the long term. In other words, when the stock market has zigged, the commodities market has zagged," LaForge wrote this week. "As a result, commodities have been able to help stabilize a portfolio's value during bear markets in stocks. Of course, past performance is no guarantee of future results."
But why was the past year so different? All signs are pointing to an already familiar narrative – inflation.
"Commodities are major input costs for companies, many of which trade on stock markets. When commodity prices rise, it can cost a company more to produce its own products. This can weigh on a company's stock price," LaForge explained. "On the flip side, if commodity prices fall, that same company can produce its products more cheaply. This can be looked at favorably by stock investors."