I believe that commodity markets bottomed out in February, but this does not mean we are out of the woods just yet. Indeed, the economic recovery is expected to remain weak, and my colleagues at Business Monitor International continue to expect a trader’s market characterised by high levels of price volatility. However, there are several things to note about the recent commodity bear market.

Commodity Bear Markets (Peak = 100)

• Firstly, the sell off in commodities was particularly sharp in 2008 and 2009. If February really marked the bottom of the bear market, the decline from peak to trough came in at 60%, which is significantly larger than the average decline of 45% (of six bear markets since 1974).
• Secondly, the sharp decline in prices occurred over a very short period. The 60% fall in prices occurred over the course of seven months. This is much shorter than the average duration of 27 months for a commodity bear market. Although the data is slightly skewed given that the 1980’s bear market lasted 68 months, when this observation is excluded from the sample, the average duration of a commodities bear market is about 20 months.

While I think that commodity markets have already bottomed, the rapid decline in prices over a short period of time has left me somewhat cautious. Indeed, I expect to see high levels of volatility ahead and would not be surprised to see large corrections going forward. Furthermore, commodity markets remain highly correlated to equity markets and this could mitigate the effects of supply and demand dynamics. As such, while I believe the outlook for commodities remains constructive, there are clearly risks to this bullish outlook.

Tags: bear market, Commodities, declines, rally
Posted in: Commodities, Equities, General, Inflation/Deflation
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