Today I wanted to carry on from a thesis that Craig and I, at ValueTrend, put together probably more than a year ago. Some of you who have been long-term subscribers to our newsletters might have received a copy of a research paper that we did presenting an argument for a potentially sideways kind of up and down market that could last several years. If we are in any way correct, such as viewing a sideways volatility period on the markets coming up or even lower returns than has been seen over the past decade or so since the last market correction in 2008, if we’re correct about somewhat softer returns on North American markets, then some investors may be looking for alternatives.
So today I wanted to talk about commodities and is there a potential upswing in commodity markets when compared to equity markets? So let’s take a look. We’re going to just start off by noting that we’re going to talk about stocks and commodities. I wanted to start off with this particular chart.
Now this is a chart that was put together by a company called Incrementum. The gentleman that put this together wanted to compare the relative performance of the GSCI, which used to be called the Goldman Sachs Commodity Index. It’s now actually owned by the S&P Company, and they wanted to compare that to the S&P 500 Equity Ratio, the typical stock index that we are familiar with. So this is a commodity index compared to the S&P 500 Equity Index and what we want find out is the general performance. So we’re going back to the 1970’s here, and you can see that in the 1970’s right into the early 1980’s, commodities, in general, were in an uptrend. Now, since that point, we saw a downswing in commodities where over the 1980’s, and much of the 1990’s really, commodities took a backseat to equities. Now, there was the Gulf crisis.
You might remember Saddam Hussein invaded Kuwait and oil went up, but it was kind of a spike within a general trend of weakness for commodities, meaning that equities were outperforming. And we saw a return to outperformance by commodities from the mid-nineties and in through the first decade or so of the 2000’s and then 2010 to fairly recently, up until a couple of years ago, the general trend was for commodities to underperform. Many of us will remember that because, of course, what was performing was the FAANG stocks and that kind of thing. So there’s been a bit of a rhythm that I want you to see, and that is that there’s periods where commodities outperform, and there’s periods where equities outperform.
This is the Dow. Now this is going way back to its very roots, which is basically 1900 but I want to focus on the periods we just looked at. So here’s the 1970s, again where commodities were outperforming. So if we look at the Dow itself, you’ll notice it was dead flat during the 1970s and into the very early 1980’s. The market took off between 1982 actually and the 1990’s and you can see that trend. Here’s the 1980’s into the 1990’s and you can see commodities underperformed during that period where stocks were doing very well. Once again, we went into a sideways period from around basically 2000 to around 2013 when the market broke out. But just for argument’s sake, 2000 to 2010, you can see the markets were flat not going anywhere.
Well, what did commodities do? In 2000 to 2010, you can see commodities did well. Now you have a period where from 2010 to 2020, you remember that commodities were moving down, but stocks were moving up, as we very well know, once again driven by both the FAANGs and recently some other tech stocks that I probably won’t even need to bring to your attention with all the news about Nvidia and all that. But the rhythm is what I want you to notice is that there are periods where commodities outperform, and there’s periods where stocks outperform, and it’s not a bad thing to try to catch that wave when stock markets may be in an underperformance period. So the question is, right now, are we entering into one of these more sideways periods? As I said, Craig and I presented a paper. We argue that there’s a pretty good possibility of that.
We even argued from a perspective of an Elliot wave view. I quoted Robert Proctor’s book which is the Wave Theory and Socioeconomics and he basically noted that there’s certain patterns in wars and that kind of thing, which of course we’ve seen with the Ukraine war recently, where markets tend to move into sort of consolidation, flat to underperforming periods. So there’s an argument from many perspectives that we could be in one of these monstrous sideways periods. Now, from a close up view, these swings, for example, during the 1960’s and 1970’s, basically some of these swings were like 20, 30, 40% and same with these swings. These were actually two 50% swings on the Dow. So don’t get the impression that a sideways market is filled with 10% up and down.
It’s anything but. We’re talking about macro cycles and these macro cycles apply to the commodities as well. They do big moves up and down, and we saw big move after COVID in commodities, and we’ve recently seen a good pullback in some of the commodities. I’m trying to look at the big picture here. So I’m asking the question, is there an argument to be made for commodities to outperform stocks? So let’s take a look at the commodity index a little bit closer. We were comparing the Goldman Sachs Commodity Index to the S&P 500 in the first slide. Now, let’s just look at the GSCI’s trend by itself, which during much of the 2000’s has been down, and it looks to be breaking that down trend. So the black arrow would be the down trend. This is the level of resistance.
It was support, it turned into resistance. You can see it kind of held the line. It was kind of an area of around 3000 or so on the index. And it looks like, after a breakout from both the trend line and that resistance area, it’s pulled back. So the question right now is, will that line hold? So there’s possibly some fundamental arguments that we could make for that line to hold and let’s take a look at it. This is a chart that I presented in my green energy metals video, which I did about a month or so ago for those watching my videos regularly might remember this chart. What I was trying to show is that the demand for critical metals that are used in green energy is forecast to increase by 70% by 2030. But in particular, nickel, copper, and platinum are, are the biggies.
You can see in the 2020 the demand, for example, nickel wasn’t that high. Copper, there was certain amount of demand and platinum was just on scene. Now we’re saying by 2030 the demand, particularly if you look at the demand for nickel, is going to be huge with all the lithium batteries and whatnot, and copper as well, which has always been a standard industrial metal that’s been in demand. And of course platinum should pick up, and you can see going out to 2040, which is really not that long from now. It seems like a long way off, but take a look at the demand for that burgundy line which is platinum. Of course nickel is through the roof and copper.
So these are metals that are going to be growing from substantial levels from where they are today. This is something we should keep in mind as we think of that big commodity cycle. Is this going to influence commodities? Well, I guess if they’re right, yes. I got this research from Bear Traps so let’s assume it’s correct or at least reasonably accurate. Take it from the horse’s mouth itself. The Energy Information Administration, EIA of America says fossil fuels will continue to grow despite all the efforts by, I think, politically posturing governments more than realists. There is a strong need for fossil fuels and in fact, right now, about three quarters of all energy needs come from fossil energy.
The EIA, even with all the projections for renewables, which you can see on this line, to go up, the need for fossil fuels, including petroleum and natural gas and that kind of thing, are going to ramp up from today. And they’re saying quite a large increase. I think it was about 40% increase from current levels, world population, and they cannot keep up with demands by trying to build more windmills and nuclear. Obviously the nuclear is a very reasonable way of meeting power needs in the world, but it’s still going to be good old fossil fuels and this is from the EIA itself. So this is not politically desirable from maybe many politicians that are trying to push for carbon taxes and all this stuff, but the reality behind the usage of fossil fuels is that we’re going to need it.
We’re going to need it for another 20 years, and it’s only going to grow, not shrink. It’s going to grow. Sure the renewables will grow too, but we’re still going to be using lots and lots of these carbon-based fuels, and therefore there’s probably an argument for commodities to do okay. So let’s take a look at the final thing, and that is the global inflation rate. Now, this is global inflation rate, not in North America. I will tell you that US inflation has averaged over a very long period of time, something like 3.5%, and you can Google it and you’ll find out that’s accurate. I think it’s either 3.4 or 3.6% as the long-term average for inflation in the US and I think it’s very similar in Canada. But this is a global rate, and quite frankly, it’s not far off that mark.
If you looked at the chart here, this goes back to the year 2000. It’s not super long, but you can see that inflation did dip on a global level, forget North American which stayed in the 2% range for much of the past couple of decades. But if you look at the global scene, we did have, prior to the recent spike, levels under 3%. Well, if global inflation returns to more about their average rates, which is at least in the mid threes, which we were just talking about, let alone the spikes into the 4% level, then that would probably also present a reasonable argument for commodities to do ok because people turn to commodities. In fact, commodities are part of the inflation equation so investors buy the commodities because inflation is created by commodities rising.
So at least that is one of the factors influencing commodities in addition to all this wonderful money printing that we have seen in North America. Now thankfully, in the US, in order to meet the debt ceilings, the Democrats had to agree on some spending cuts much to their chagrin. We don’t have a system like that in Canada so I would expect that with all the continued money printing in Canada without a system where the opposition can basically force the current government to stop printing money and handing it out like it’s confetti, I would suspect that the Canadian inflation challenge will be here with us for a while. So with all that in mind, I think it’s pretty reasonable to suggest a 3.5% inflation rate after rates come down from maybe their highs of late.
So let’s just come to some basic conclusions and that is that if the fundamentals we just looked at, such as the growing need for fossil fuels and the growing need for metals, particularly copper, nickel, and palladium, these are expected to grow. That is an argument for commodities because they are key commodities beyond the stocks that we often talk about. Things like cotton and food and all that kind of stuff. So the next thing that I’d like to consider is that we may be entering into a sideways period on the stock market. If that’s the case, we’ve seen the chart, when stocks go sideways, commodities outperform. So that’s another argument for commodities in one’s portfolio. Now this again, is all very macro long-term stuff I’m talking about. I’m not talking about what commodities are going to do by August of this year. I’m talking about what commodities might do by August of 2030. So that’s really the discussion today. It’s not near term timing at all. Final thing is that if inflation returns to the long-term averages, forgetting even North American averages, but global averages, it’s over 3%. That’s high enough for us to be bullish on commodities with inflation settling down to the less realistic levels of 2% that we have seen.
So I hope that argument gives you some food for thought. It doesn’t mean you run out and back up the truck and bike commodities in your portfolio to an overweight position, but I think you’ve got to keep this in your cranial vaults as we move forward in the investment cycle, because I, for one, believe that commodities are going to be an, an important tool over the coming 1, 2, 3 decades.
