Most investors are missing one crucial story. And it has been unfolding for the past couple of years...
Commodity prices are collapsing... They're down by nearly a third since mid-2022. And they're now hitting multiyear lows.
This isn't what we'd normally expect to see. High inflation and rising commodity prices should go hand in hand... Not to mention, oil and gasoline prices are still above their pre-pandemic levels.
But commodities are crashing. And according to history, we can expect that collapse to continue.
Let me explain...
Inflation has been the big economic and financial story since 2021. Rapidly increasing prices affected everyone... And they contributed to the brutal bear market in 2022.
The rate of inflation has eased dramatically over the past two years. Price growth is nearly back to pre-pandemic levels. But almost everything is still much more expensive than it was just a few years ago.
The inflation rate is falling... but the damage of higher prices isn't going anywhere.
Despite that, commodity prices are down by a large margin. They've fallen 29.5% in a little less than two years. And they hit a multiyear low in the process. Take a look...
The Bloomberg Commodity Index soared as pandemic-induced inflation took hold. This benchmark has now given back most of those gains. And we can expect further losses from here.
That's because the index hit a new 52-week low during the recent decline. In other words, the trend is down. And the past 50 years of data shows commodities tend to keep falling after hitting new 52-week lows. Take a look...
Commodities haven't budged much over the past half-century. They've only returned 0.4% over a typical six-month period.
Still, commodities – like most assets – have a habit of moving in trends. And that means they tend to keep falling after hitting new lows...
Similar setups led to 4.6% losses in three months and 6% losses in six months. Commodity prices also fell 65% of the time over six months... which means the probability of more losses is relatively high.
Again, this is a trend most investors have completely missed. Commodities don't make the headlines. But the downtrend is in force.
History tells us we can expect the losses to continue. And until that changes, it would be wise to avoid a broad investment in commodities.
Good investing,
Brett Eversole
Further Reading
"The secret to generating big returns lies in managing risk and harnessing volatility," Dr. David Eifrig writes. Most folks think risk and volatility are the same – but that isn't strictly true. Here's how you can use these ideas to avoid big losses and let your winners ride... Read more here.
When it comes to investing, sometimes your greatest enemy can be yourself. It's easy to overcomplicate your approach to the markets – especially in the face of uncertainty. But by using a few simple tools, you can cut down on stress and sleep well at night... Learn more here.
