Stay Away from Commodities at the Beginning of Economic Downturns

Some analysts have suggested purchasing commodities as a way of diversifying portfolios as a defensive measure for the upcoming recession. Using data from the USGS, I have charted the percent price change of certain commodities during the last three global recessions:

In general, commodities tend to trend downward in price for the first one or two years following the declaration of the recession. The global recession of 1998 was very short in duration, had mixed commodity price results, and was not consistent with this general observation. However, commodity prices did not generally appreciate during this 1998 recession.

There is no data I could find which supports a conclusion that this is the time to be investing in commodities. However, there always are sustainable arguments that a specific commodity might perform well at this time due to certain marketplace dynamics.

Disclosure: None.

Comments

[Maya_:]

Basic materials tend to significantly underperform during the late contraction. During the early expansion, they will tend to market perform and while further price damage may result, much of the damage has already been done during the late contraction. Today several commodities offer very good yields and excellent value in the context of long term FCF generation. The valuations may get better, but trying to time a bottom is a fools game.

2008 Nov 07 11:06 AM

[NOWHEREMAN:]

the question then appears to be whether we are at the beginning or towards the end of the Recession.

I submit that it is closer to the beginning since most of the current malaise has been Financially driven not consumer driven. The employment rate is only in the second month of the normal type of contraction seen.

I would hazard a guess that a monthly decline or two above 400,000 will be seen before the late stage can possibly be envisioned.

Besides, who has heralded that the US is officially in a recession, YET?

2008 Nov 07 01:52 PM

[jepittman:]

Unemployment is a lagging ecomic indicator. Unemployment has been trending up for a year and has recently risen at an increasing rate. If you look at the 2001-2003 chart most commodities bottomed near the midpoint of the recession and had sharp price rises well before the recession ended. The action is similar in the other recessions. As the author suggests it may still be early but history tells us an upward move will begin well before the economy bottoms and the moves are often violent. Our current unemployment rate is 6.4%. The consensus estimates I have seen for the peak run from 7.5% to 10%. If you are in the 10% camp it is early. If you are in the under 8% camp it is getting close.


On Nov 07 01:52 PM paultaut wrote:

> the question then appears to be whether we are at the beginning or
> towards the end of the Recession.
>
> I submit that it is closer to the beginning since most of the current
> malaise has been Financially driven not consumer driven. The employment
> rate is only in the second month of the normal type of contraction
> seen.
>
> I would hazard a guess that a monthly decline or two above 400,000
> will be seen before the late stage can possibly be envisioned. <br/>
>
> Besides, who has heralded that the US is officially in a recession,
> YET?

2008 Nov 09 01:34 PM

[Maya_:]

Aha Paul - the recession started in Dec 07. Now lets see when it ended.


On Nov 07 01:52 PM paultaut wrote:

> the question then appears to be whether we are at the beginning or
> towards the end of the Recession.
>
> I submit that it is closer to the beginning since most of the current
> malaise has been Financially driven not consumer driven. The employment
> rate is only in the second month of the normal type of contraction
> seen.
>
> I would hazard a guess that a monthly decline or two above 400,000
> will be seen before the late stage can possibly be envisioned.

>
>
> Besides, who has heralded that the US is officially in a recession,
> YET?

2008 Dec 09 10:40 AM