Et Tu, Commodities?

The best bet in markets this year has been commodities. While stocks and bonds have almost uniformly sold off, oil, wheat, and copper and more have rallied strongly. The iShares GSCI Commodity Dynamic Roll Strategy exchange-traded fund (ticker: COMT), which includes a basket of energy, metals, and agricultural commodities, soared more than 50% from the start of 2022 through the first week of June.

Over the past two weeks, however, things have gone downhill even for commodities. The ETF is down about 7% since June 7, slightly more than the S&P 500. Many individual commodities are down much more than that.

At first glance, that could be a relief for inflation-weary investors and consumers. Sharp increases in fuel and energy costs in particular have been a major component of multi-decade high inflation readings in recent months.

But the reasons for the about-face aren't encouraging. Investors and traders have been pushing down commodity prices because they're worried about a recession decreasing demand for them in the not-too-distant future. Needless to say, a recession just creates a host of other problems for investors to contend with.

Here's Barron's Lawrence C. Strauss writing today:

A weaker economy would reduce, in theory, demand for some things. Copper, for instance, might very well be one of those commodities that falls out of favor. In a downturn, construction slows—copper is used in wiring and plumbing—and other industries make fewer things like electrical equipment, which also uses the metal.

Experts, however, differ on how long these price declines will last and how much they would cool inflation.

Edward Yardeni, president and chief investment strategist at Yardeni Research, told Barron’s that commodity prices offer a good read on the sentiment about the global economy.

"Right now they are definitely pointing towards weaker demand for commodities broadly, which could only be because global economic growth is slowing,” he added.

Helima Croft, head of global commodity strategy at RBC Capital Markets, echoed Yardeni. “Fears of a global recession have become front and center, eclipsing the inflationary concerns,” she said.

For Croft, the softness in commodity price shows “real concerns about a hard landing and what that would mean for demand.”

The greatest driver for oil and wheat, in particular, is on the supply side. Russia’s war in Ukraine and retaliatory sanctions by Western allies have done more to impact prices than an abundance of demand. And that geopolitical wildcard doesn't have a clear end in sight.

Read the rest of Lawrence's commodities coverage here.