Ask a Broker
Q: Why have commodities and equities continued to move in the overall same direction? I thought they should move inversely.
A: Lind Plus Senior Market Strategist Adam Klopfenstein answers.
Historically, the commodity and equity markets have had their own rhythms and cycles that have provided a diversified investment strategy to smooth the overall returns in a customer’s portfolio. A strong correlation between stocks and commodities isn’t an historical norm, but market cycles sometimes overlap. The two different asset classes can move in the same direction, which is what we have seen recently. In June, the correlation between the S&P 500 and Reuters/Jefferies CRB Index (a basket of 19 commodities) hit a high of 0.74, the tightest correlation in 50 years.
The major theme that is moving both equities and commodities in recent months is the overall recovery (or lack thereof) in the economy. As the equity market has rallied sharply off its March lows, we have seen traders and investors get back into commodities as both a hedge against future inflation and as a speculative investment as overall demand growth for hard assets (commodities) begins to be reevaluated by market participants.
You can see the strong correlation between the S&P 500 and crude oil by looking at charts of the two markets over the past few months. We have seen equities and crude oil move largely in tandem because an economic recovery is a harbinger for stronger future demand for energy.
Overall, I see this correlation between commodities and equities continuing in the near term. There will be times, however, that commodities and equities move in different directions, particularly when looking at individual commodities. Gold, for example, may benefit from safe-haven bids if stocks decline sharply. Feel free to contact me at my professional trading desk if you would like to discuss this topic further, as well as to develop specific trading strategies to take advantage of opportunities taking shape in today’s markets.
Adam Klopfenstein is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-266-0551 or via email at aklopfenstein@lind-waldock.com.
Kristina Zurla Landgraf is editor of Lind eWire. She can be reached at editor@lind-waldock.com.
Futures trading involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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