Commodities tend to outperform when equities go down

Bloomberg

06-03-2025

In our blog from a year ago, we highlighted how commodities tend to outperform in late cycle economic environments while other asset classes underperform. When other asset classes get pulled out with the tide, commodities can be an anchor in a portfolio by moving against in a risk-off scenario. Looking at the past six decades, exhibit 1 demonstrates the historical uncorrelated nature of commodities prices to other major asset classes found in typical portfolios. There were only a few instances since 1960 when commodities tended to have a higher than 0.4 correlation to equities (highlighted in light blue) – these episodes have occurred after big global shock events such as GFC and the Covid crisis. Most recently correlations have been moving toward zero across the major asset classes.
Looking through a historical macro lens, there have been examples when the unique performance attributes of commodities really shine when equity markets fall or even move sideways. In 2025, there are plenty of reasons why a market participant may want to reduce an allocation to equities and diversify by adding or increasing an allocation to commodities, such as elevated stock valuations, impact from tariffs imposed by the US administration or sinking market sentiment.
Commodities do not have the same drivers of performance as equities. Commodities do not have earnings estimates to beat or rely on what analysts think a stock price will do over the next 12 months. Commodities prices fluctuate based on the current point in time situation, already this year there are several themes – Tariff Effects and Peak Supply – playing out as was highlighted in our 2025 Outlook.
A broad commodities benchmark like BCOMTR has had a strong start to the year verifying its role as a diversifier in a portfolio. If equities lose momentum this year, commodities could take the charge forward as deflationary momentum has stalled and could potentially reverse. Exhibit 2 shows how commodities and equities performed during the quarters when inflation rose the most over the past four decades. Only one quarter showed commodities had a negative performance, but this was in 2022 after commodities rose 25% the prior quarter. Looking back to the start of BCOM history in the 1960s, equities fell in 16 years and had an average drawdown of 14% while commodities averaged a positive 6% return over these same equity down years.
Traditional diversifiers like fixed income have not behaved as expected since 2021 with correlations to equities over the last four years in positive territory for much of the time. This is a change from the typical negative correlations seen over the past century. Other diversifiers like private equity have gained in popularity and performed well but do not have the liquidity of commodities markets. Broadly, market participants are still under allocated to commodities, even though participation has been picking up.
Simply going long commodities or tactically going long individual or sector commodity exposures has worked well recently, particularly for softs, precious metals, and livestock. Sophisticated market participants sometimes gain exposure through a long/short expression to take advantage of carry dynamics between different commodities. Shorting a commodity in steep contango like wheat or a precious metal could provide a pickup of at least 5% a year based on the current futures curves in Exhibit 3.
The rise in gold prices challenges the traditional relationship between gold, USD and real rates. Strong central bank buying, futures positioning that has risen close to all-time highs, and big inflows of over $5 billion into physical backed gold ETFs over February 2024 have all helped push the price of gold to all-time highs despite the traditional fundamentals. If gold breaches the $3000 mark, at least a pause in price action could be warranted.
Gold may continue its path higher if there is sustained safe-haven demand and cautious market sentiment. During uncertain times, diversification is a dear friend and uncorrelated assets such as commodities could be the diversifier market participants continue to consider when thinking about risks for 2025. The diverse nature of commodities sectors and individual commodities allows market participants to initiate long/short exposures based on specific drivers of performance differentiated within the broad commodities universe which provides opportunities for expression outside of a simple long-only exposure. If equities move into a bear market after recent multi-year outperformance, market participants could find opportunities with a diversifier in their portfolio like commodities.