Commodities: The Secret Weapon Against Stagflation?

Dear valued readers,

The recent testimony of Federal Reserve Chairman Jerome Powell before Congress on March 7th has once again raised concerns over the potential for stagflation in the economy. With rising inflation and interest rates, traditional asset classes such as cash, bonds, and stocks are likely to suffer. However, there is one asset class that has historically thrived in such conditions: commodities.

Commodities offer high returns, low correlation with other assets, and protection from inflation. According to Credit Suisse’s Global Investment Returns Yearbook, commodity futures have delivered an annualized excess return of 6.5% for dollar investors in the long run, outperforming even American stocks. What’s more, commodity futures are little correlated with shares and move inversely with bonds, making them an effective diversifier in a portfolio.

Investors can mix commodity futures with other assets to create a portfolio with a much better trade-off between risk and return. A portfolio that is evenly split between stocks and commodity futures has historically delivered a better return than a stock-only portfolio, with three-quarters of the volatility. And in stagflationary years, commodity futures have had an average excess return of 10%.

While commodity futures have been gaining traction among high-octane investors, they remain an esoteric asset class rather than a portfolio staple. However, given their historical performance and their potential as a hedge against inflation, it may be worth considering adding them to your portfolio.

It’s important to note that, like any investment, commodity futures do not offer guaranteed returns. Additionally, the market is relatively small, and physical supply is constrained. But for smaller outfits and fast-money investors, commodity futures offer a lot of advantages.

In conclusion, commodities shine in a time of stagflation. They offer high returns, low correlation with other assets, and protection from inflation. While they may not be a mainstream asset class, they have the potential to be a valuable addition to a diversified portfolio.

Thank you for reading!