Commodities: Is the Bear Market Near Its End?

On the surface, 2014 looks to be a tough year for commodities, as multi-year projects increase the flow of supplies to market even as demand has turned tepid, especially in emerging markets. However, a deeper look at the history of this asset class suggests that the outlook for commodities might turn around sooner than many expect.

A closer look at GDP

As the chart below shows, the excess returns provided by commodities over cash have historically had a very high correspondence with global gross domestic product (GDP) growth. In short: When global GDP accelerates, commodities have tended to do well — in particular, the more cyclical commodities like oil and copper.

Since the consensus view is that global GDP growth is poised to accelerate in 2014, this historical trend may bode well for commodity investors this year.

Commodity excess returns have tended to move along with global GDP *


Examining bear markets

Looking at the history of bear markets for commodities also suggests that the worst could be behind us in the current bear market.

There have been four commodities bear markets in modern times, starting in 1974, 1980, 1997 and 2008. Right now, the current bear is 5½ years old, and prices are still only half of what prior peak levels were. This is nearly the worst experience for commodities in modern history. That’s not to say that prices can’t get worse from here, but to assume that the next few years will continue to be poor for commodities is really pushing against market history.

Staying prepared

While the current bear market has been tough for commodity investors, I believe the biggest risk would be to exit the asset class, which could cause investors not only to miss a potential upturn, but to lose out on the inflation-hedging benefits that commodities have historically provided to portfolios.

Investors are rightfully concerned with positioning their portfolios to take advantage of the current environment, but I believe they should also look to maintain a diversified core within their portfolio that can help provide resiliency against unexpected events. For example, as the Federal Reserve (Fed) plans its exit from aggressive monetary policy, it’s not clear exactly what the effects might be and what could possibly go wrong. Might the Fed taper its asset purchases too slowly and create inflationary pressures? If so, we would expect inflation-sensitive assets like commodities to potentially perform well versus stocks and bonds.


Due to the experiences of the past, combined with the uncertainties of the future, we believe investors should take a constructive view of commodities and the role that they can play in a portfolio.

Specifically, I believe some of the more cyclical commodities, such as oil and copper, represent the most compelling opportunities for commodity investors right now, versus others such as agriculture and precious metals.

*Sources: DataStream, World Bank, Goldman Sachs, Invesco analysis. Data from 1/29/71 to 12/31/13.

1 Excess return above treasury bills. Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.

2 2013 estimate and 2014 forecast from Goldman Sachs Economic Research. Past performance cannot guarantee future results.

About risk

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Commodities may not be suitable for all investors.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.




All data provided by Invesco unless otherwise noted.

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