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The King is Dead, Long Live the New King!

The US and global economy may be witnessing the biggest tightening cycles in the past decade. Geopolitical tensions in Europe, lockdowns in China, the spread of Covid-19, supply bottlenecks, and global trade wars may set into motion a paradigm shift within the financial landscape.

If the events persist, they are significant enough to trigger a broad change in market leaders. Technology and growth stocks, once market darlings, are suffering one of the worst declines since the global financial crisis. Sector by sector and stock by stock, the previous leaders succumb to devastating selling. New leaders are emerging, including commodities, value stocks, and the laggards from the past decade. The transition will be painful as many investors are ill-prepared for this change in leadership.

Usually, the leaders from the previous bull cycle (i.e., 2009-2021) do not repeat their leadership roles in future uptrends. With each new bull market, new leaderships emerge to entice investors to return to the marketplace. The structural forces that drive a new bull market are often different from the past. New industries, markets, investment styles, and stocks replace the older and previous popular ones.

Pay attention to inflation, recession, and stagflation as they can structurally change the dynamics of the financial markets. Inflation tends to erode the purchasing power of investors and the profit margins of businesses. If inflation remains elevated over long periods, it can ignite a transition toward new leaders, including commodities, energy, utilities, basic materials, real estate, value style investing, etc.

The potential structural shift in market leadership reminds us of the traditional proclamation made following the accession of a new monarch, "The king is dead, long live the new king!"

Below is a discussion of the potential structural shifts developing between stocks and commodities.

Hard Assets versus Soft Assets

Hard assets such as commodities and real estate are tangible, real, and physical assets. You can touch and feel it. Such assets are in sharp contrast to soft assets such as paper assets, including stocks and bonds. The performance of commodities and stocks is dependent on the economy. Because economic cycles are cyclical, they tend to alternate between periods of expansions and contractions (i.e., economic slowdowns and recessions).

Commodities tend to excel during the late expansions and early recessions periods. When the economy slows, the FED moves toward an accommodating monetary stance by lowering interest rates (Federal Funds rate) to stimulate economic activity. The Fed's action leads to periods of outperformance from commodities. Soft 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 evaluate the performances between stocks and commodities is by analyzing 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 it declines, it suggests commodities are outperforming stocks.

Relationship between Stocks and Commodities

Over the exceptionally long run, stocks have consistently outperformed commodities. For instance, in the past 100 years, starting in June 1922, an investment in the stock market (i.e., SPX) and commodity market (PPI) returned 49,405% and 1,436%, respectively.

Stocks and commodities are inversely correlated, mainly because equities and commodities behave differently during the various phases of an economic (business) and credit cycles (interest rates).

The primary reason for the sharp discrepancy in stocks and commodities is because stocks dramatically outperform commodities during late recessions and early expansions. On the other hand, commodities outperform during the late expansions and early recessions.

Alternating Cycles of Outperformance and Underperformance

The stocks to commodities ratio (SCR) chart shows alternating 18-year periods 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 is as follows:

The gold standard began in 1879, triggering 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, evidenced by one of the most impressive bull runs in the past century, 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, the 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, and US wars in Afghanistan and Iraq led to a commodities boom cycle as stocks traded sideways.

In 2009, at the end of the global financial crisis/recession, interest rates plummeted to record lows, leading to the current deflation cycle as stocks rallied higher.

Is the 2009 Deflation cycle coming to an end? Will the supply bottlenecks, Ukraine/Russian debacle, Covid-19 pandemic, and trade tensions/wars ignite the next commodities super cycle?


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 and commodities super cycles (i.e., the lifting of the gold standard in 1933, the Nixon shock of 1971, and wars (WW1, WW2, Vietnam, Iraq, etc.)).

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 13-years, stocks have consistently outperformed commodities. However, in the past six to eight months, stocks have underperformed commodities. The commodities ratio has fallen from a high of 19.86 (Dec 2021) to a recent low of 14.74 (May 2022).

So, the question then becomes – does this signal a leadership transition from stocks toward commodities and other new leadership markets, sectors, industries, investment styles, and securities?

One final point worth mentioning: the current outperformance cycle of stocks over commodities is now thirteen years, at least based on the 2009 bottom. Remember, the average duration cycle between the two asset classes is eighteen years.

Is the current stock market setback a cyclical bear and not a structural bear? Can the cyclical bear decline in stocks end, leading to the resumption of the 2009 structural bull market? Are there another five years left in the SPX/PPI ratio uptrend, matching the historical 18-year average duration of the stock/commodity structural cycles?

Performances of financial assets depend heavily on such structural factors as macroeconomic (deflation, inflation, stagflation trends), geopolitical, etc.

Currently, inflation is a new economic phenomenon. Deflation remains the dominant and longer-term economic trend. However, if inflation remains elevated or stagflation occurs, this may end the outperformance cycle of stocks, ushering in a new king - the super commodities cycle.

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

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

Source: Courtesy of

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