Is 60/40 well and truly dead?
I doubt it. First of all, 60/40’s a religion. A religion organized around a correlation assumption that says bonds can cushion an equity portfolio during periods of turbulence. That assumption was undermined in the 2020s, when macro developments drove up inflation, activated monetary policy and undercut bonds. Far from being a stabilizer, bonds were a source of portfolio volatility. But religions aren’t so easily dislodged as all that, religious zeal being generally immune to empirical refutation. Retirement portfolios aren’t going to be reorganized en masse away from bonds and into commodities.
More than that, I still doubt the most extreme versions of a macro-policy-geopolitical narrative I otherwise buy. It makes all the sense in the world to suggest we’ve entered a new era defined by rolling bouts of macro-policy shocks and that in this new era, bonds will exhibit more volatility than they did previously, or anyway won’t be the sort of docile creatures you can safely lever five times and sleep at night. That’s especially true given the supply realities associated with fiscal “excess,” and a shifting buyer base where price-sensitive investors are supplanting price-agnostic bidders. But to suggest, as some have, that bonds are now persona non grata, and should be replaced entirely with an allocation to raw materials, seems alarmist not to mention perilous.
But so far in the 2020s, commodities “are a better ’40’ than bonds,” BofA emphasized, noting that over the past four years, total returns for the long bond are negative to the tune of almost 40%, while commodities are annualizing low- to mid-double digit returns over the same period and are still doing ok “even amidst falling inflation.”
To be sure, raw materials were the worst performer across assets in 2023. And as the figure shows, they’ve underperformed again in 2024. But a 4% decline last year and a 3% gain this year isn’t too shabby considering the monumental gains logged in 2021 and 2022.
How this shakes out going forward — i.e., whether commodities continue to be a better “40 choice” than bonds — depends heavily on whether we have, in fact, transitioned out of the macro regime that typified the so-called Great Moderation. BofA suspects we have. And they’re hardly alone.
“The unchecked flow of people, goods and capital [is being] replaced by fractious politics on two out of those three,” the bank said, before suggesting that “scrutiny of capital flows” is coming to a geopolitical theater near you, with the potential to trigger “big market volatility.”
The figures below are simple enough. On the left is average headline inflation across the world’s richest economies. On the right is a long-term rolling lookback for commodities.
Certainly, I’m on board with the notion that commodities are a must-own for everyone. They’re a natural geopolitical hedge and they’re also portfolio protection against humanity’s date with climatic reckoning, with the caveat that depending on the scope and severity of that reckoning, portfolios will be irrelevant.
Whether that bull case means we’re entering a secular bull market for commodities is debatable. I’ve heard that before, and it didn’t pan out.
But if you ask BofA, commodities are “just getting started.” After all, globalization’s reversing, as are the debt and deficit dynamics that drove the four-decade bond bull. That’s “all inflationary,” the bank said. As are “AI and net zero policies.”
Seem to me the bonds vs commodities choice may reflect one’s views on
1. Inflation and interest rates.
2. De-globalization and re-Balkanization.
3. Geopolitical conflict, Cold War II.
Of course these are all related. As countries or blocs bring their trade flows home, prices for goods will go up; similarly, as global financial flows retreat with trade flows and rising distrust, prices for money should go up.
Then there is the oft-called-for commodity supercycle based on green responses to climate change, and the equally-oft-called-for commodity downcycle based on global recession. Interestingly, those seem related too – if #1-3 above come to pass, will countries care as much about climate change as won’t they be more often in recession?
In the short term, November feels like a major factor, with so-called “Trump trades” often heavy on inflation and commodity exposure. In the longer term . . . well, maybe we should just see what happens in the next three months.
I’ve kept my eye on commodities, and it seems to me “commodities” is mostly bank’s fancy-speak for “oil.” Base metals, paper, chemical products, rare earths, seem well enough included in SPX for my understanding of those sectors.
Are commodities and equities actually un- or inversely-correlated? Charting and eyeballing GI00 and SP50 over 20 years suggests GI00 would have helped offset a SP50 decline in one year in 2007/08 and six months in 2022 – in other words, for the first part only of those equity market declines – and then would have added (greatly) to pain in the rest of the 2008/09 and 2022 downturns. I think commodities are mostly a pro-cyclical bet. As a hedge in a down-cycle, they might work at first, then you’d want to get out. Interestingly, the time to get out was pretty close to when fixed income, charting IEF, would have started helping. The rhythm might be: equities for early-mid cycle, commodities for late-cycle, fixed income for recession.
I don’t do commodities for two reasons. First, commodities are the only zero-sum investment. For me to make money, the other side of the trade has to lose the same amount and vice versa. I have spent most of my life in farm country, Indiana, Illinois, Iowa, and now Missouri. I have known many farmers and investors who trade in this market. I have known few outright winners. I attended a seminar given to a select group of invited academics some years ago, given by two top commodities brokers. For two hours they regaled us about the techniques they used to separate us retail commodities from their money. I left convinced I was unlikely to be a winner in this arena.
The other reason I don’t do commodities is that the market has no long run inflationary trend in it. Corn prices today are lower that they were in the mid-19th century. Whenever demand for commodities increases, prices go up but soon supply becomes economically viable, so supply increases, generally from changes in technology, productivity, and other reasons, and prices fall again. Look at egg prices since pre-covid. Up and down like mad. Nobody really does a good job at predicting this behavior so I stay away.
While I know some folks have managed to make real money in this vehicle, mostly it would be at my expense.