Do Stocks Need a Bull Market in Commodities?

Commodities are up, stocks are up. Commodities are down, stocks are down. This has been the story of 2016 thus far with a remarkably high correlation of .96 between the S&P 500 and the CRB Commodity Index over the past 20 trading days.


But is the past few weeks a good indication of the relationship between stock and commodities over the long run? Are they really joined at the hip as we are now being told?

As it turns out, the answer is no. The longest running commodities index is the CCI Index, with data going back to 1957. The rolling correlation over that time to the S&P 500: close to 0.


This means that there is no discernible relationship between commodity returns and U.S. equity returns. We can see this more clearly in the table below.

The CCI Index has had 28 negative calendar year returns since 1957. The S&P 500 has been down in only 7 of those years, or roughly 25% of the time, much worse than a coin flip. In fact, the last 5 calendar years (2011 – 2015) were all down years for commodities, and the S&P 500 advanced in every single one of these years.


That is not to say that stabilization in commodity prices from here would not be a welcome sign in the short-term for markets. It would, particularly given the deleterious effect the commodities crash has had on the credit markets.

But to say that U.S. stocks or the U.S. economy need higher commodity prices (or higher Oil) to thrive would be contrary to the historical record. The U.S. economy is not the Russian economy, and the vast majority of businesses are not tied to the price of Oil, Gas, Copper and Gold. In fact, many actually benefit from lower input costs when commodity prices go down. The answer to the question from the title, then, is an affirmative no. U.S. equity investors do not need a commodities bull market.

The real question for equity investors is whether the crash in commodities is a symptom of not only slower Global/Chinese Growth (we already know this to be true) but also an oncoming U.S. recession. On this point, it is simply too early to say. While Manufacturing/Industrial Production indicators are certainly pointing to increased odds of recession, Jobs/Housing/Services/Retail Sales are not there yet. I’ll cover this in more detail in an upcoming post.

For our research on Lumber and Gold, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

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