Stocks have been the best way for most folks to build real wealth with their savings over the long term…
Since the day before I was born, the S&P 500 has risen annually by an average of 7.2%. It doesn’t sound like much, but it’s a great return if you can keep it up for 60 years.
Every $10,000 invested 60 years ago is worth about $640,000 today. That’s not bad for doing absolutely nothing for 60 years… though I must admit that someone probably doesn’t have a lot of capital on hand the day they’re born.
My point is… equities are near all-time-high valuations today, and anybody who has held them for decades knows they’ve been a tremendous long-term investment.
Today, though, I want to focus on something else – and get a sense of where the broader world of commodities stands. In short, while this is a volatile asset class, we could be on the verge of a new market cycle…
Let’s start with a look at the S&P GSCI commodity index from 1971 to the present.
You can clearly see two distinct eras…
The first era is after the U.S. brought an end to the gold standard, starting in 1971. Commodity prices adjusted higher and ratcheted sideways until around 2004, when the rapidly growing “BRIC” economies (Brazil, Russia, India, and China) started consuming more raw materials.
Prices adjusted higher around that time. And since then, they’ve ratcheted sideways a second time – with plenty of volatility…
Commodity prices have always been volatile – and they likely always will be.
That’s because these industries tend to be capital-intensive, low margin, and highly competitive. Commodity producers don’t have the luxury of setting the price at which they’ll sell their product. With supply and demand setting prices, it leads to a lot of volatility.
So, where does that leave commodities today?
Commodity prices have ripped higher this year. The S&P GSCI is up 33%… That’s about eight percentage points better than the S&P 500.
It’s important to compare commodities to stocks and see where we stand in the cycle…
You see, learning to read commodity market cycles can be a very lucrative proposition – and it can offer excellent diversification during times of poor equity returns.
Below, we have the decade-by-decade total gain or loss for the S&P 500 and the S&P GSCI commodity index. Take a look…
The S&P 500 has tripled your money or better in three of the past five decades. But as you can see, in the other two decades… commodities outperformed the benchmark stock index.
Equities performed poorly due to inflation in the 1970s and the bursting of the dot-com bubble in the 2000s. So even though equities underperformed for different reasons in those two decades, commodities proved to be an incredible hedge for investors both times.
The point is… commodities are highly cyclical and tend to be volatile, but they’ve provided an effective hedge in decades when equity returns have disappointed. And as I mentioned earlier, they’ve done better than stocks so far this year.
We can’t know what will happen in the future… but perhaps this is a glimpse of a new market cycle.
My sense for where we stand in the present suggests that the markets are approaching an important turning point… a decade of higher commodity prices and generally poor equity returns would be right in line with the picture we’ve just painted.
We’ll see what happens between now and 2031… But keep this in mind as we head into the new year.
Good investing,
— Dan Ferris
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Source: Daily Wealth