A new era for commodities?
We may be on the cusp of another period of strong commodity returns.
June 2024, From the Field -
June 2024, From the Field -
Commodities have significantly underperformed stocks in recent years—particularly since 2009. In fact, from January 1, 1981, through April 30, 2024, the price of the S&P 500 Index rose more than 3,600%, cumulatively. Over the same time period, the S&P GSCI, an index of commodity prices, gained just 390%.
This lopsided result might lead some investors to conclude that diversified investment portfolios don’t need to include commodities.
But there also have been long periods where commodities significantly outgained stocks—most notably during the entire decade of the 1970s. Typically, such periods have been characterized by high inflation and modest stock market returns.
From January 1, 1971, through December 31, 1980, for example, the price of the S&P 500 Index rose a mere 47%, while the commodity index price increased by 563% on a cumulative basis. Meanwhile, over that same time period, annual U.S. inflation (as measured by the consumer price index) averaged 7.8%.
There are reasons to believe we may be on the cusp of another period of strong commodity returns.
This is because of three emerging “megatrends” that have the potential to drive the prices of many commodities considerably higher in the coming decade. These include:
Deglobalization: Rising trade barriers between the U.S. and China, combined with massive supply chain disruptions seen during the COVID pandemic, have led to a partial reversal of globalization. As a result, supply chains are being rebuilt and reorganized so that trading partners are more politically aligned.
Decarbonization: The global push toward greener energy sources means that older, carbon-heavy fuels will need to be replaced by less carbon-intensive energy sources. This is likely to create a transition period where energy supplies become tighter.
Artificial Intelligence: Artificial intelligence promises to be very energy-intensive, as it requires an enormous amount of computer processing power to operate.
We can already see evidence of tailwinds emerging for commodity prices. Notably, copper and natural gas, which stand to benefit from these macro trends, have both recently experienced sharp price increases.
Copper is a vital input both for the electrical grid expansion that will be required by decarbonization and for building out the data centers needed to support artificial intelligence applications.
Natural gas is widely viewed as an important transitional energy source for decarbonization because it is considered cleaner than coal. It is also the primary energy source in many U.S. regions where data centers are being built.
Peaking U.S. oil productivity is another trend that has the potential to boost energy prices.
Following the 2008-2009 global financial crisis, advancements in shale technology allowed oil companies to extract significantly more oil even as the number of oil rigs in service declined sharply. As a result, oil prices have increased very modestly over the past 15 years.
But we are seeing signs that the days of increasing oil productivity may be coming to an end. Some key measures of oil productivity have fallen steadily over the past year.
If this is, in fact, a durable trend, it would mean that oil price increases are unlikely to remain modest over the next 15 years.
Commodity price gains have been relatively modest for a long period of time, but we may now be facing a new environment over the coming decade.
Emerging macro trends such as deglobalization, decarbonization, and artificial intelligence, have the potential to boost demand for key commodities, while energy supplies may be constrained.
As a result, our Asset Allocation Committee currently holds an overweight position in real assets equities.
Commodities have significantly underperformed stocks in recent years, particularly since the end of the 2008–2009 global financial crisis. From January 1, 1981, through April 30, 2024, the price of the S&P 500 Index rose more than 3,600%, cumulatively, while the S&P GSCI, an index of commodity prices, gained just 390%.
This lopsided result may have led some investors to conclude that commodities no longer have a place in a diversified investment portfolio. However, there have been long periods where commodities outgained stocks—most notably the inflationary decade of the 1970s (Figure 1).
January 1971 through December 1980. Past performance is not a reliable indicator of future performance.
Source: Bloomberg Finance L.P.
January 2000 through April 2024
January 2003 through April 2024
Source: Bloomberg Finance L.P.
There are reasons to believe we may be on the cusp of another period of strong commodity returns, thanks to three emerging “megatrends.”
We can already see evidence of tailwinds for commodity prices. Copper and natural gas futures have risen sharply in recent months. Meanwhile, peaking U.S. oil productivity has the potential to boost energy prices.
Advancements in shale technology have allowed oil companies to extract more oil even as the number of oil rigs in service has declined sharply. However, key measures of oil productivity have fallen steadily over the past year (Figure 2).
Commodity price gains have been relatively modest for a long period of time, but we may now be facing a new environment. As a result, our Asset Allocation Committee currently holds an overweight position in real assets equities.
Timothy C. Murray
Capital Markets Strategist
Tim Murray is a capital market strategist in the Multi-Asset Division. Tim is a vice president of T. Rowe Price Associates, Inc.
Non-U.S. bonds currently offer higher yields on a currency-hedged basis
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