The rally for the stock market is coming at the expense of raw materials including crude oil, wheat and gold as equities trade at the highest valuation relative to commodities in four years.
The CHART OF THE DAY shows the ratio of the Standard & Poor’s 500 Index of equities to the S&P GSCI Spot Index of 24 raw materials reached 2.4 on March 6, the highest since February 2009. The S&P 500 is less than 2 percent from a record reached in October 2007 and has rallied 8.8 percent this year. The GSCI is up 0.3 percent in 2013 and 27 percent lower than the all-time high touched in July 2008.
Commodities have slumped this year as supplies will outpace demand for 12 of 18 metals and agriculture goods, according to Barclays Plc and Rabobank International. At the same time, low global interest rates and stimulus from central banks have boosted company earnings, sending the Dow Jones Industrial Average to a record last week.
“The fundamental factors that would push commodities higher just haven’t been there in terms of supply and demand,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “Monetary policy may be starting to force cash off the sidelines and into equities.”
Production will exceed demand in aluminum, copper, lead, nickel and zinc this year, Barclays forecast in a Feb. 15 report. Surpluses are also expected in cotton and sugar, according to Rabobank International. Crude-oil stockpiles in the U.S., the world’s biggest consumer, are at the highest since the end of June, a government report showed March 6. Oil futures are little changed in New York this year.
“Equities are benefiting the most from the availability of cheap money as the growth story has been getting some traction,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. “The reason why commodities are not following is due to the fact the supplies are currently ample to meet increased demand.”
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