Commodities have become a forgotten asset class — they fell into a cyclical bear market after peaking back in 2022, and with other assets faring much better I guess it kind of makes sense that investors have begun to ignore this corner of the market.
But things are changing and it’s time to remember commodities because commodities will remember us.
First, straight into the chart: it shows the historical seasonal pattern of commodity prices (diversified GSCI Light-energy index) and WTI crude oil.
More to the point: it’s showing a seasonal tendency for strength in H1 for commodities — this is a big deal for a couple of reasons...
And before you go on about the fallibility of seasonality (and it is fallible, it doesn’t always work, with many exceptions to the rule), just remember; in commodity markets seasonality isn’t just fun with numbers it’s real physical changes in the natural world and real shifts in supply and demand. So you tend to give it a bit more weight than say stock market seasonal trends.
That all said, we pay much more attention to seasonality when it confirms or lines up with an existing thesis and thus serves to build conviction, and I would have to say that my conviction in the bull case for commodities is building.
As a quick overview: my indicators show commodity valuations are cheap, technicals are improving (breadth turning up from oversold, the index is close to a major breakout), Intermarket indicators are supportive (commodity/gold ratio ticking up + gold strength leading commodities), the cyclical demand outlook is supportive (China rebound + stimulus, Europe rushing rate cuts, US strong as ever), supply growth is constrained (decade of weak capex by commodity producers), and along with bullish seasonality there appears to be a new multi-year upcycle underway.
We need to remember commodities in this context — even if you don’t or won’t invest in them because a surge in commodity prices is going to present upside risk to inflation (remember inflation? —p.s. see bonus chart below on inflation)
So: don’t forget this intriguing and important asset class because things could get very interesting this year
Key point: Commodity prices have a seasonal tendency to rise from Jan to June.
Bonus Chart: As noted, the setup I just outlined above if it comes to pass will present near and pressing upside risk to inflation and that will come at a time where global growth reacceleration risk is starting to become a reality + as the chart below shows the Great Disinflation has stalled.
I don’t think we get a repeat in the magnitude of the 2021/22 surge in inflation. Still, we are clearly into the higher-for-longer rate of inflation timeline, and that’s going to have important implications for the path of monetary policy, bond yields, and ultimately both yield sensitive assets and the stock market as a whole if things end up getting disruptive.
So I am advocating a cautious stance on equities given they are so overvalued, a cautiously optimistic stance on bonds (they are cheap), and a highly bullish stance on commodities as a key way to both hedge and participate in this theme.