Stocks to Commodities Ratio

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, commotities 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 eighten 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
• Quandl: S&P 500
• Historical Statistics of the United States, Colonial Times to 1970: Commoditiy Index until 1913 (Chapter E, pages 199-201)

Further Information

• TradingView Chart: Stocks to Commodities Ratio
• Bannister & Forward, 2002: The Inflation Cycle of 2002 to 2015
• Longtermtrends: Commodity Prices