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Commodities to Stocks Ratio – DWMA
December 13, 2017

Domestic stocks recently hit all-time highs while commodity indexes are closer to multi-decade lows set in 2016. Currently, stocks are overvalued while commodities are undervalued. Figures 1 and 2 employ the Goldman Sachs Commodity Total Return Index (GSCI TR), which includes T-bill interest earned on futures held at the Chicago Mercantile Exchange. Figure 1 divides the value of GSCI TR by the S&P 500 Price Index (SPX). Figure 2 does the same but replaces SPX Price with SPX TR. Both figures plot the 10-year trailing price-to-earnings ratio for SPX, currently near 27 relative to its mean of 17.6 since 1969.

Figure 1. Stocks Very Overvalued & Commodities Very Undervalued

InFocus Highlights - All Figures end Dec 8, 2017. Figures 1-2 begin Dec 31, 1969. Figures 3-4 begin Dec 8, 2005

  • The GSCI/SPX ratio sits at 0.9 with a mean of 4.2 in Figure 1 while the ratio is 0.2 with a mean of 1.5. It is usually not wise to measure a total return index relative to a price index. The above results show that in both cases, stocks are overvalued and commodities are undervalued. The ratio peaked during three crises: 1973-74, 1990 and 2008.
  • Figures 3-4 compare the Dunn Capital Management Managed Futures Composite (DWMA), which consistently recorded robust 12-month rolling total returns irrespective of the direction of the GSCI or the Thomson Reuters Commodity Research Bureau Index ratios to SPX. Both ratios plunged in 2014-2015 while DWMA experienced very positive returns (black rectangles).

Figure 2. Stocks Very Overvalued & Commodities Very Undervalued

Figure 3. GSCI/SPX Ratio & DWMA – Last 12 Years

Figure 4. CRB/SPX Ratio & DWMA – Last 12 Years

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