The Fed’s easy monetary policy has supported the U.S equity and bond rally since 2009. However, energy commodities have lagged equities and bonds due to global investors’ fear of prolonged deflation.
It is interesting to see that since its inception in 1982, the S&P GSCI energy index always outperformed the S&P 500 index in the immediate year following a 4-year under-performance period. The table below summarizes all four cases for this phenomenon.
| Index/Period | 1983-1986 | 1990-1993 | 1995-1998 | 2003-2006 | 2009-2012 |
| S&P 500 TR | 103.6 | 49.8 | 190.1 | 73.3 | 72.4 |
| S&P GSCI Energy TR | 25.5 | -15.2 | -12.8 | 50.9 | 17.2 |
| Average Nominal U.S GDP Growth | 8.3 | 5.1 | 5.7 | 6.0 | 3.3 |
| U.S Unemployment Rate | Down from 9.6 to 7 | Up from 5.6 to 6.9 | Down from 5.6 to 4.5 | Down from 6 to 4.6 | Down from 9.3 to 8.1 |
| Energy’s Relative Performance to Equity One Year Forward | 8 | 6.2 | 71.3 | 36.4 | ? |
Fundamentally speaking, multiple years of economic expansion with a continued decline in the unemployment rate can fuel energy demand or inflation concerns and therefore push up commodity prices. All except the 1990-1993 case follow this logic. In fact, the unemployment rate declined from 7.5% in 1992 to 6.9% in 1993 as the market was worried about possible inflation.
As the global recovery continues in 2013, it is worth monitoring the trend of energy commodities to see if history will repeat itself.
Comments provided by guest writer Rui Wang, CLS Investment Research Analyst
0332-CLS-2/1/2013