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Stocks to Commodities Ratio (SCR)

Hard Assets versus Soft Assets

Hard assets such as commodities and real estate are tangible, real, or physical assets. You can touch and feel it. Such assets are in sharp contrast to soft assets or paper such as stocks and bonds. The performances of commodities and stocks, like other major asset classes, depends on the economy. Because economic cycles are cyclical, they will alternate between periods of expansions and recessions.

Commodities tend to excel during the late expansions and early recessions. When the economy slows, the FED will often lower interest rates (Federal funds rate) to stimulate economic activity. The action then leads to periods of outperformance from commodities. Financial assets such as stocks and bonds, on the other hand, often underperform during recessions. However, stocks tend to deliver superior performance during the late recessions and early expansions of an economic cycle.

Stocks to Commodities Ratio (SCR)

One way to quantify the performances between stocks and commodities is by running the stocks to commodities ratio (SCR). The ratio measures soft assets such as S&P 500 Index (SPX) relative to hard assets such as commodities (Producer Price Index). The general interpretation is when the ratio rises, it implies stocks are outperforming commodities. When the ratio declines, it suggests commodities are outperforming stocks.

Relationship between Stocks and Commodities

Over the long run, stocks have outperformed commodities. In the past 100 years, starting in 1921, an investment in stocks (SPX) and commodities (PPI) returned 54,741% and 1,033%, respectively.

Stocks and commodities are inversely correlated mainly because equities and commodities behave differently during the phases of an economic cycle and credit cycle (interest rates). The primary reason for the discrepancy between stocks and commodities is stocks tend to perform better during late recessions and early expansions. Commodities, on the other hand, outperform during the late expansions and early recessions.

Alternating Cycles of Outperformance and Underperformance

The stocks to commodities ratio chart show alternating 18-year cycles of outperformance and underperformance cycles. The 18-year cycles correspond closely to inflation and deflation trends.

The timeline for the performance cycles between stocks and commodities are as follows: Gold standard begins in 1879 soon led to the start of the deflation cycle and stock market boom cycle. The panic of 1907 led to inflation. WW I followed, and commodities would soar. The commodities bubble burst in 1920 soon triggered a stock market boom cycle as evidenced by one of the greatest bulls in the past decade, namely the roaring 20s stock market bull. The stock market crash of 1929 soon led to inflation and the beginning of WW II. Commodities again resumed their leadership role, rallying sharply higher. The commodity bubble burst in 1950, which led to deflation and the start of the Nifty-Fifty bull rally in stocks. In 1971, Nixon's impeachment, devaluation of the US Dollar, Vietnam War, and the OPEC oil embargo ignited hyper-inflation as commodities skyrocketed. In 1982, the end of the double-dip recession, US interest rates peaked, and deflation ignited the 1982-2000 stock market bull run. In 2000, the bubble burst, US wars in Afghanistan and Iraq led to a commodities boom cycle as stocks traded sideways. In 2009, the end of the global financial crisis/recession, interest rates plummeted to record lows, led to the current deflation cycle as stocks rallied higher.


In summary, periods of deflation have translated to structural bull trends in stocks and sideways or bear trends in commodities (i.e., the gold standard of 1879, Bretton Woods after WW2). However, the transition from deflation to inflation led to commodities bull trends (i.e., lifting of the Gold standard in 1933, the Nixon shock of 1971, and wars (WW1, WW2, Vietnam, Iraq)).

Since 2009, the end of the financial crisis/global recession, a deflation cycle has led to the structural bull trend in stocks. In the past 12-years, stocks have consistently outperformed commodities. The stocks to commodities ratio rallied from a low of 4.76 (2009) to a high of 19.00 (February 2021). In the process, stocks (SPX) have generated a 486% return.

So, the question then becomes – will stocks continue to outperform commodities?

Despite the current 12-year outperformance cycles of stocks over commodities, the average duration remains eighteen-years. It is possible stocks can continue with their outperformance cycle for six more years to reach their long-term historical average. However, future outperformance will still depend on the US economic conditions (deflation and inflation trends). Currently, deflation remains the dominant and prevailing economic trend. If inflation develops through an external shock or a war in the Middle East, Asia, or any global hotspots, this may end the structural bull run in stocks and lead to the next commodities bull.

Source: Courtesy of and Federal Reserve Bank of St. Louis

Source: Courtesy of and Federal Reserve Bank of St. Louis

Source: Courtesy of (FRED – Economic Research Federal Reserve Bank of St. Louis)

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