Stocks have outperformed commodities for the first time since April following commodities biggest three-month gain, according to a note from S&P Dow Jones Indices. The commodity rally ended in July with commodity indices producing some of the worst performances since records began in the 1970’s as a stronger dollar and declining probability of a rate hike this year put pressure on the asset class.
The commodity rally ended in July after the S&P GSCI posted its third worst performing July on record
According to data from the index provider, the Dow Jones Commodity Index (DJCI) lost 6% in July, while the S&P GSCI lost 9.6% in total return. The latter saw its third worst July on record, dragged down by 16 out of the 24 commodities seeing their value drop in July, which is the most since November 2015 when 22 were down.
Jodie Gunzberg, Global Head of Commodities and Real Assets at S&P Dow Jones Indices, explained that July was a bloodbath for commodities with the S&P GSCI giving up all its gains from the second quarter of the year and is now -65bps for the year.
The iShares S&P GSCI Commodity-Indexed Trust (NYSE Arca: GSG) is an exchange-traded fund tracking the S&P GSCI. In July it lost 12%, according to Bloomberg. As of 29 April 2016 the fund has an equity beta of 0.30, highlighting the benefit to portfolio diversification that the ETF may provide. The fund has a total expense ratio (TER) of 0.75%.
There is no ETF tracking the DJCI, but Barclays offers the iPath Bloomberg Commodity Index Total Return ETN (DJP), which saw its value fall 8.8% in July.
The only other time the S&P GSCI has performed as badly in July was in 2008 and 2015 when the index lost 12.2% and 14.1%, respectively.
There were major losses from energy (-13.6%,) agriculture (-6.5%) and livestock (-7.4%). Brent crude and (WTI) crude oil also declined notably at -13.5% and -15.3%, respectively, in their second worst July ever amid declining Chinese demand and rising supplies.
Gunzberg told ETF Strategy that different fundamentals split performance by sector. “There was renewed oversupply in oil coupled with declining demand, moderate weather driving agriculture, low demand for livestock, supply pullbacks in industrial metals and investor flight to safety combined with possibly negative rates drove precious metals.”
Other notable losses were lean hogs, which posted its fourth worst month on record at -17.5% and gasoil with -16.8%. All single commodities in these sectors lost except cocoa +0.4% and cotton, which was the best performer of all, gaining 15.4% as a result of plunging inventories due to drought. This is cotton’s 13th best month ever and fifth consecutive positive month, driving its longest winning streak since Nov. 2013 – Mar 2014. Similarly, industrial and precious metals performed well, gaining 2.0% and 3.1% for the month in the S&P GSCI, respectively.
Precious metals also held fast with gold holding onto its record gain post Brexit, while silver added 9.3% in July – more than quadruple gold’s monthly gain of 2.3%.
Gunzberg explains that this may indicate real fear hasn’t gripped investors into holding gold instead of silver yet and that they are willing to take some economic risk from industrial applications of silver. “On average when gold rises, silver rises about 2.7 times as much, but when gold falls, silver falls about twice as much. Though in crisis times, gold often gains while silver falls. This last happened in Aug. 2015 around the Chinese stock market volatility, but also occurred in the global financial crisis, tech bubble burst, Black Monday and the early 80’s recession,” she said
However, there may be a bright spot as nine commodities –corn, cotton, feeder cattle, lean hogs, lives cattle, natural gas, soybeans, sugar and wheat – continued to have positive roll returns, indicating stock shortages.
Source: S&P Dow Jones