The Current Investment Season is: Late Fall Heading into Winter
During this season of slowing growth and rising inflation, stocks and bonds perform very poorly; and precious metals, commodities, and their miners do very well.
A Graphical History of Bull and Bear Markets in Stocks, Bonds, and Commodities
When analyzing the graph below please note that there has not been an era when all three asset groups have been in bull (blue) or bear (white) markets at the same time. Money rotates from asset to asset during cycle changes. Currently, a secular change is commencing when stocks and bonds begin bear markets and commodities and precious metals launch into bull markets. Source: NDR
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Stocks to Commodities Ratio
The stocks to commodities ratio measures the S&P 500 relative to the commodity market index PPI (Producer Price Index). When the ratio rises, stocks beat commodity returns - and when it falls, commodities beat stock returns. The chart's y-Axis is logarithmic and over the long run stocks clearly outperform commodities.According to Baran (2013) stocks and commodities are negatively correlated. The main reason is the fact that equities and commodities behave differently during the short term credit cycle. Stocks perform better in late recessions and early expansions while commodities overperform in late expansions and early recessions. Furthermore, Bannister and Forward (2002) found that equities and commodities alternate on leading the market on average every eighteen years (18-year cycles), which also corresponds to deflationary and inflationary cycles. Periods of deflation are characterized by a boom in stocks and sound money (i.e. gold standard of 1879, Bretton Woods after WW2). These periods are followed by inflation , including inflationary events such as the Gold nationalization of 1934, the Nixon shock of 1971, and war (WW1, WW2, Vietnam, Iraq). Realizing their position in the cycle, in 2002 Bannister and Forward correctly predicted the outperformance of commodities over the following years and the risk of war in the Middle East. Source: https://www.longtermtrends.net/stocks-commodities-ratio/
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The Single Greatest Predictor of Future Stock Market Returns
Currently, investor equity allocation is at all-time high predicting that future stock market returns will be very poor as the investor equity allocation turns downward.
Sources: 1) https://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/2) https://www.marketwatch.com/story/the-single-greatest-predictor-of-future-stock-market-returns-has-a-message-for-us-from-2030-2020-06-19 3) https://www.marketwatch.com/story/the-latest-forecast-from-the-single-greatest-predictor-of-stock-market-returns-is-downright-bearish-01624629686
The Most Accurate Predictor of Future Recessions and Expansions
When the yield of the 10-year US Treasury Bond minus the yield of the 2-year US Treasury Note goes negative as it initially did on Friday, April 1, 2022, it signals that there will be a recession in the reasonably near future. Source: FRED
