Stocks, Commodities Break Up the Band; The Correlation Between the Two Markets Is at its Lowest Since October 2008

March 31, 2013, 9:14 p.m. ET

Stocks, Commodities Break Up the Band

The Correlation Between the Two Markets Is at its Lowest Since October 2008


Commodities have been shut out of the stock market’s recent party.

Even as the U.S. stock market notched record highs in recent weeks, prices of raw materials, often used as a barometer of the global economy, have languished.


Commodities have posted their worst first quarter since 2010. The Dow Jones-UBS UBSN.VX -0.14%Commodity Index, which tracks commodities ranging from oil to corn, is down 1.1% in the period. The S&P GSCI commodities index, which also follows a variety of commodities but has more exposure to energy prices, has performed slightly better, rising 1.5%. But both indexes are well off the 10% rise this year of the Standard & Poor’s 500-stock index, which closed at an all-time high Thursday. The Dow Jones Industrial Average also has been hitting consecutive records.

The close ties between daily movements of commodities and stock markets, which have persisted mostly uninterrupted since the financial crisis, have frayed. The daily movements of the S&P 500 and the S&P GSCI commodities index were more or less in tandem for the past five years. But in recent weeks, the two indexes’ correlation—a measure of how closely markets track one another—has fallen to the lowest level since October 2008.

Outsize gains in stocks compared with commodities have raised some questions about the state of the recovery. Lackluster commodity prices can be viewed as a harbinger of sluggish economic growth.


But many investors and analysts say that large supplies of basic goods are more to blame for weak prices than cracks in the global economy. They don’t view increasing stockpiles of copper, crops or crude oil as a sign of stagnant industrial production or weak manufacturing demand.

Instead, they say, the increased output from mining, oil fields and crop production begun in the last decade, when prices were high, is creating a supply cushion that is keeping commodity prices from rising as the economy expands. At the same time, persistently low inflation has made an investment in commodities less attractive as a protection against rising costs.

“The weakness in commodities prices isn’t a statement on global economic activity,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, a Philadelphia firm that manages $55 billion. “It’s a situation where supply caught up with demand. It’s not necessarily a worrying sign.”

While investors are flocking to stocks, they are backing away from commodities. Net outflows out of commodity index funds this year have totaled $3.5 billion through March 19, according to Citigroup C -0.49% . The U.S. Commodity Futures Trading Commission said the value of investments in commodity-index funds declined 2.9% in the first two months of 2013. Throughout the 2000s and even after the financial crisis, investors were pouring money into the sector.

Some experts are cheering the weakness in commodity prices, saying that, if sustained, it could translate into lower production costs for companies. That, in turn, could give the broader economy a boost in the form of bigger corporate profits.

Copper prices are down 6.8% year to date, hitting a seven-month low on Thursday, as mine expansions in Chile and Peru come to fruition.

Aluminum prices are approaching a five-month low, as growth in China’s metallurgical industry allowed the country for the first time last year to become a net exporter of the key component in cans and packaging.

Prices of Brent crude oil, widely considered to be the global benchmark, are down 1% this year, and even U.S. gasoline prices are dropping after a rally to start the year. Last week, the nationwide average pump price for unleaded regular was nearly 25 cents a gallon lower than it was a year ago.

Subdued oil prices are helping keep stock markets in the U.S., Japan and Europe buoyant, says Michael Shaoul, chief executive of Marketfield Asset Management in New York. “Everything works a little better with lower energy prices,” he said, adding that his firm, which oversees $7 billion, continues to bet on stock prices rising.

Others, though, caution that falling prices on some raw materials also reflect slowing demand from China, the world’s largest consumer of copper, coal and iron ore. Slower growth in China could create headwinds elsewhere in the world.

Doug Noland, portfolio manager of the $900 million Federated Investors Prudent Bear Fund, which aims to shield investors from stock-market declines, said commodities “are an important indicator for us.” Recent price moves, he said, suggest equity investors are ignoring cracks in the global economy.

Central banks have pumped huge amounts of money into their economies, which has helped keep stock markets rallying, but the underlying economy may be growing weaker if demand for basic goods, especially in China, is falling, he said.

“It’s an indication that there are structural problems that are being ignored,” Mr. Noland said. In the past month, he has become more aggressive in betting against manufacturers and heavy-equipment makers.

Some investors view the recent disparity in performance of commodities and equities markets as an indirect endorsement of the Federal Reserve’s efforts to shore up the U.S. economy without stoking inflation.

In the early stages of the Fed’s bond-buying programs, fund managers boosted exposure to commodities amid fears that the Fed’s purchases would fan inflation by injecting excessive amounts of money into the economy. That sent commodity futures prices surging.

But inflationary pressures haven’t materialized and investors have pulled out.

“It’s fatigue, from expecting inflation and not seeing it,” says Justin Pawl, portfolio manager at Covenant Multifamily Offices in San Antonio, Texas. “We don’t believe there is any inflation on the horizon, so a decline [in commodities] isn’t shocking.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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