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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

DISCLOSURE: This report does not provide tailored investment advice. It was prepared without regard for specific circumstances and objectives. The securities shown may not be suitable for all investors. Arrow Insights recommends that investors independently evaluate particular investments and strategies. The appropriateness of an investment or strategy will depend on investor circumstances and objectives.

The contents are not an offer to buy or sell any security or to participate in any trading strategy. Arrow Insights and its affiliates or its employees not involved may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report.

Arrow Insights and its affiliate companies conduct business related to securities covered in its research reports, which may include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, and investment services. Arrow Insights makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.

Past performance is not a guide to future performance. Any estimates of future performance are based on assumptions that may not be realized.



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