This past year has been a roller-coaster ride for many investors. Domestic stocks experienced an unprecedented decline at the onset of the COVID-19 pandemic, followed by a breathtaking rally that caused equity prices to skyrocket.
Now, investors are trying to figure out what comes next.
With the U.S. presidential election behind us and vaccines being administered, there are reasons to believe that the economy should return to growth this year. So, where will investors find the most value in 2021 and beyond?
While American stocks continue to rally, they aren’t the only option for investors. We’ve already written about the potential for discovering outsize returns in emerging markets, but investors might want to consider adding exposure to another asset class in the coming months: commodities.
Why Invest in Commodities?
Regardless of whether they occupy a place in your portfolio, commodities play an important role in your life. They include products that are usually grown or mined, and they are a critical component of the global economy. Grains, copper, silver, and gold are popular commodities that have been produced and traded for centuries, and they are inexpensive relative to the S&P 500 index. Investors routinely buy and sell commodity futures on major exchanges like CME Group, though there are ways to gain exposure to them through publicly traded commodity producers without purchasing futures.
It’s safe to say that commodities have been in a bear market since 2008, and they have generally been outperformed by other asset classes — especially stocks — over the past decade. However, the tides seem to be turning. If you’ve been wondering when to invest in commodities, now could be a perfect time. Just keep the following factors in mind:
- Stocks are expensive. Outside of the historic plunge that occurred this past spring, American stocks have enjoyed one of the longest bull runs in history. No bull market lasts forever, and it’s reasonable to assume that investors will eventually want to reduce exposure and take profits. Considering most major indicators suggest equities are generally overvalued, a downturn could be on the horizon.
- Inflation is coming. Congress and the Federal Reserve have taken unprecedented action to stimulate the economy amid the COVID-19 crisis, with millions of Americans losing their jobs and countless businesses closing. With Congress passing multitrillion-dollar spending bills and the Fed purchasing corporate, state, and local government bonds as well as agency mortgage-backed securities “in the amounts needed to support smooth market functioning,” according to Chairman Jerome Powell, accelerating inflation seems inevitable.
- The commodity cycle is reversing. When wondering why you should invest in commodities, remember that high prices cure high prices and low prices cure low prices. After many years of declining prices, new investment in various commodity sectors has declined commensurately. Farmers have been buying fewer new tractors and using less fertilizer, while miners have explored fewer new mines. The result will come in the next few years with less new supply, setting the stage for the next commodity bull market.
As you consider whether and when to invest in commodities, remember that commodity prices can be highly cyclical and, at times, volatile. Also, note that one of the benefits of investing in commodities is that they can make a useful hedge against inflation and stagflation, serving as a diversifier in portfolios heavily exposed to the stock market.
Are you asking yourself whether you should buy commodities now? To learn more about them and our investment approach, visit us here. We’re always happy to chat!
This commentary is prepared by Pekin Hardy Strauss, Inc. (dba “Pekin Hardy Strauss Wealth Management”, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. The information contained herein is neither investment advice nor a legal opinion. The views expressed are those of the authors as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy Strauss Inc. cannot assure that the type of investments discussed herein will outperform any other investment strategy in the future. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee their accuracy. There are no assurances that any predicted results will actually occur. Past performance is no guarantee of future results. The S&P 500 Index includes a representative sample of 500 hundred companies in leading industries of the U.S. economy, focusing on the large-cap segment of the market.