It is our belief that Commodities are in a longer-term bear market following the sharp spike in prices that took place between 1999 and 2008. During this time, the Bloomberg Commodity Index gained 12.3% on an annualized basis, easily outpacing a 2.1% annualized return for stocks. Strong commodity gains were driven by a culmination of factors that included underinvestment through much of the 1980s and 1990s, as well as surging growth in emerging markets (particularly China). Rising commodity prices eventually encouraged a surge in investment and production capacity, including the shale revolution in the United States.

The chart (below), created by Ned Davis Research, illustrates commodity prices dating back to 1800 (blue line) and the 10 year rate of change (red line). Historically, when commodity annualized returns have reached levels seen last decade, prices experienced a prolonged slump in the years afterward. Consequently, we believe commodity and oil prices will remain low for some time.