At a glance:

  • Commodities Rebound: Commodities have seen a solid start in 2024, as evidenced by the Goldman Sachs Commodities Index returning +6% year-to-date, rebounding from a poor performance in 2023.
  • Mixed Energy Prices: Energy prices have shown a mixed performance, with crude oil experiencing a 12% increase while natural gas has seen a significant decline of 26% due to abundant supply.
  • Inflationary Pressures: Commodities, including agriculture, are reacting to stronger demand and increased inflationary pressures in 2024.
  • Market Dynamics: The relationship between energy prices and the stock market is highlighted, with historical data suggesting that when crude oil outperforms equities, stocks tend to struggle, and vice versa. The current situation indicates a potential shift towards energy prices outperforming equities, raising concerns for investors and risk managers regarding future market dynamics and inflation trends.

Commodities are off to a solid start in 2024 with the Goldman Sachs Commodities Index returning +6% year-to-date after delivering quite a poor showing in 2023. Commodities tend to perform well late in the business cycle when strong demand and inflation pressures have their greatest impact. Energy prices have been mixed with crude oil (+12%) and natural gas (-26%). The abundant supply of the latter has led to a collapse in natural gas prices over the last 12 months. Agriculture commodities are also reacting to stronger demand and increased inflationary pressures this year. Perhaps most interesting of all is that the perceived best monetary inflation hedges, gold and bitcoin, are breaking out to new all-time highs in USD terms at the time of writing. Investors are starting to get increasingly concerned about ‘sticky’ inflation impacting markets. Should we be worried?

The answer to this question can determined by the future path of energy prices relative to the stock market. When crude oil prices outperform equities on a trending basis, stocks tend to struggle. Conversely, when equities outperform crude oil, stocks have delivered strong rewards for patient investors. Looking at the next chart, from 1990 to 1999, crude oil underperformed the S&P 500, which coincided with a strong decade-long bull market for equities. From 1999 to 2012, crude oil outperformed the S&P 500. During this time, US equities failed to make new highs, instead trading in a wide range with deep corrections and two painful bear markets. The trend resolved once again in favour of equities relative to oil from 2012 to 2020. This was another strong period for stock markets. However, since 2020, energy prices have once again started outperforming on a relative basis. Stocks have held up relatively well to date but this may well be a result of loose monetary policy (until recently) and record loose fiscal policy in the US.

We are watching closely to see whether energy prices and inflation are about to accelerate higher once again or whether this trend resolves lower in the months ahead. It will have important consequences for investors and risk managers alike.

That concludes our March investment update. We look forward to providing you with further insights and our updated views on markets again in our next report in May.