Insights

Posted on January 8, 2018

Committing to Commodities in 2018

Blog

Published by Taylor Financial Group

We’ve all heard of corn, cotton, and coffee, which are basic commodities that we use every day.  But did you know that many Wall Street analysts are now looking at commodities as an attractive alternative investment vehicle? We began re-introducing commodities into portfolios in 2017, but this year there are several reasons why we want to use commodities more frequently.

Watch Out for Inflation!

Inflation, as measured by the core Consumer Price Index (CPI), has risen at an average rate of 1.76% since 2009.  Inflation in 2018 “may catch investors off-guard”, according to Barron’s.  Global inflation is expected to rise in 2018, and domestic inflation is expected to be between 2% to 2.5%.

During times of inflation, investors frequently buy commodities, like gold, as a hedge against rising prices.  Inflation can decrease stock prices, so this is another reason why commodities are attractive.  The Chairman of The Federal Reserve indicated that they are “monitoring inflation developments closely.”  If the dollar does weaken as a result, Barron’s believes that “commodities – most of which are priced in dollars” will become more valuable.  Inflation also tends to coincide with economic growth, which can heighten demand for building products, oil, and other commodities.

Potential for Increased Returns

We all know that 2017 was an epic year for the stock market as the S&P 500 posted a 19.42% return.  But is this trend likely to continue? In August of 2018, we will officially be in the longest bull market in history, spanning over nine years.  When stock prices go down (which does happen), commodity prices tend to increase.  According to DoubleLine CEO Jeffrey Gundlach, a very well-respected investment manager, “commodities are just as cheap relative to stocks as they were at turning points in previous [economic] cycles that began in the 1970s and 1990s.”

Higher Commodity Prices

A broad range of commodities are expected to increase in price.  Bloomberg forecasts that oil prices should rise to $60 a barrel in 2018 compared to $53 near the end of 2017.  The production cuts from OPEC as well as the global stock market increase have pushed oil prices higher.  In fact, gold prices should remain high in the first quarter of 2018 as investors digest if the recent US tax cuts will result in economic growth.  According to MarketWatch, copper prices also rose to a four year high in December 2017 due to strong Chinese imports.  Even deliveries to suppliers at manufacturing plants has slowed, which indicates that prices for supplies will rise, according to the Institute for Supply Management.  Exposure to these commodities could benefit a portfolio as demand increases.

Diversification

The old adage for investing is to not put all your eggs in one basket.  We believe that commodities can add another level of diversification to a heavy equity portfolio because these assets are not always tied to the bond or equity markets and can reduce volatility and risk.  We are excited to bring you additional investing themes for 2018.  In the meantime, call or email us with questions.

 

Share: