Financial markets in the “Roaring ‘20s” (of the 21st century, that is) have been dominated by surging equity markets and bouts of volatility caused by a global pandemic, inflation, geopolitical upheaval and a technology sector that has driven equity markets to all-time highs. Throughout this period, balanced strategies have been able to reap the rewards—with commodities topping the performance charts. For example, either gold or broad commodities have led all asset classes in four of the past five years (see Exhibit 1).
As inflation may remain elevated, governments may continue to expand to budget deficits and geopolitical conflicts may continue to impact the global markets, we reflect on the importance of commodities and look to the S&P GSCI to quantify how the broad-based commodities index has outperformed when it matters most. We will also examine how commodity performance has responded to inflation, central bank easing and periods of geopolitical uncertainty. This analysis will provide a better understanding of the importance of commodities in a broader index context.
When It Matters Most
The return of inflation to the global economy is one of the most significant risks to have emerged after decades of negligible price increases. After nearly a decade of zero-interest rate policy and quantitative easing, policy makers found themselves focused on the inflation-fighting side of their dual mandate. Equities and bonds tend to deliver below-average returns in rising inflation environments, while inflation-sensitive assets (such as commodities, inflation-linked bonds, REITs, natural resource stocks and gold) have historically been able to maintain performance during these periods. Commodity outperformance has delivered on its reputation as an inflation-sensitive asset, with the S&P GSCI up 40% and 26% in 2021 and 2022, respectively.
Going further back in time, broad commodities have done well when inflation was elevated and the U.S. Federal Reserve maintains a defensive posture. Breaking inflation into low, medium and high inflationary environments, commodities have experienced double-digit annual gains when inflation exceeded 2%. The average one-year return when inflation measured between 2% and 4% was 14.8%. Exhibit 2 highlights how the S&P GSCI has performed during inflationary periods relative to another broad commodity benchmark, the Bloomberg Commodities Index (BCOM).
