Chart of the Day: Commodities rule

Today’s chart comes from the MarketSci blog, and illustrates the increasing correlation between commodities and equities:

This chart shows the 3 year monthly correlation of the S&P500 (the broadest US equity index) and the Goldman Sachs commodity index, from 1970. Although the GS Index is not as diversified as the CRB Index, the comparison is similar.

The correlation has increased tremendously since the GFC, surpassing the stagflation period in the late 1970’s to early 1980’s.

The risk on/risk off undollar meme kind of puts a large dent in conventional asset allocation techniques….

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  1. I’m hazarding a theory that any significant disconnect between the price of commodities and the broader economy as allegedly reflected in the stock market will inevitably be followed by a bust – you can’t divorce the price of raw materials from the price of finished goods.

    That said, that would only be nominally true on a global scale – filtering out the noise of countries more focused on services and countries where commodities are disproportionately expensive (e.g. fruit in Japan)

  2. S&P’s broadest US equity index is actually the S&P Total Market Index, which is like our All Ords.