Stocks to Commodities Ratio
S&P 500 / Producer Price Index (Logarithmic Scale)
Interpretation
The stocks to commodities ratio measures the S&P 500 relative to the commodity market index PPI (Producer Price Index). When the ratio rises, stocks beat commodity returns - and when it falls, commodities beat stock returns. The chart's yAxis is logarithmic and over the long run stocks clearly outperform commodities.
According to Baran (2013) stocks and commodities are negatively correlated. The main reason is the fact that equities and commodities behave differently during the short term credit cycle. Stocks perform better in late recessions and early expansions while commodities overperform in late expansions and early recessions. Furthermore, Bannister and Forward (2002) found that equities and commodities alternate on leading the market on average every eighteen years (18-year cycles), which also corresponds to deflationary and inflationary cycles. Periods of deflation are characterized by a boom in stocks and sound money (i.e. gold standard of 1879, Bretton Woods after WW2). These periods are followed by inflation, including inflationary events such as the Gold nationalization of 1934, the Nixon shock of 1971, and war (WW1, WW2, Vietnam, Iraq). Realizing their position in the cycle, in 2002 Bannister and Forward correctly predicted the outperformance of commodities over the following years and the risk of war in the middle east.
Data Sources
- Recent data
- Federal Reserve Bank of St. Louis: S&P 500
- Federal Reserve Bank of St. Louis: Producer Price Index for All Commodities
- Historical data
- Multpl: S&P 500 until 1927
- Yahoo Finance: S&P 500 Prices from 1928 until 2023
- Historical Statistics of the United States, Colonial Times to 1970: Commodity Index until 1913 (Chapter E, pages 199-201)
Further Information
- Bannister & Forward, 2002: The Inflation Cycle of 2002 to 2015
- LongtermTrends: Commodity Prices
S&P 500 vs. the Producer Price Index
This chart compares the percentage growth of the S&P 500 against the Producer Price Index (PPI). Over the long run, equities have meaningfully outpaced the broad commodity complex — yet the relationship moves in distinct multi-year regimes, not in a straight line.
The Correlation Between Stocks and Commodities
Interpretation
The chart above displays the 1-year rolling correlation coefficient between the S&P 500 and the Producer Price Index. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the two indices moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions.
Diversification is the practice of spreading investments across different assets to reduce risk. In his book Principles, Ray Dalio called diversification the "Holy Grail of Investing". He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.