Just recently we posted the trend-following weights for our Robust Asset Allocation model. Something interesting happened — the model suggested zero exposure to every asset, except commodities(1)

source: https://alphaarchitect.com/indexes/trend/#trendasset

My knee-jerk reaction was, “Wow, never seen that before.”

But as is the case with all emotional reactions, it is important to not lean on them too much, and instead, we need to look at the data.

Have Commodities Ever Been the Only Game in Town, Historically?

For this analysis, we wanted to get a broad sample that goes back further than the standard 90s+ range. In order to facilitate this analysis, we focused on what is called the “IVY 5”,(2)

The five core asset classes are as follows:

  • US Stocks= SP500 Total Return Index
  • Int’l Stocks= MSCI EAFE Total Return Index
  • REIT= FTSE NAREIT All Equity REITS Total Return Index
  • Comm.= Goldman Sachs Commodity Index (GSCI) Index
  • Bonds= Merrill Lynch 7-10 year Government Bond Index

Next, we deploy several long-term trend following rules on each of these asset classes from 1971 to July 2022.(3)

The below highlights the trend-followed exposures to the IVY 5 assets (assuming each are a 20% allocation).

source: alpha architect

Visually, you might be able to make out the episodes when commodities are long and everything else is bombed out. But here is a breakdown of the historical monthly signals when commodities are the only game in town. Aside from the past 2 months, the only historical time when this occurred was during the 1973 oil crisis.

source: alpha architect

The weaponization of oil production leads to big positive movements in commodities and fear in all other asset classes. Market performance through 1974 was really bad, but longer-term, market performance was decent (at least in nominal terms!).

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index. Total returns, including dividends and distributions. 1/1/1974 to 12/31/1984

Other Interesting Observations

Since we had the data handy, we decided to look at some of the other interesting patterns in the data.

Out of curiosity, we plotted the months when treasury bonds were the trending asset and all others were negative. Interestingly enough, most of these events are in the post-2007 period. This would also explain why many tactical allocation models, that rely on more recent data, generally use bonds as their ‘risk-off’ asset.

source: alpha architect

Here is a look at months when either commodities or bonds are in play, but stocks and reits are busted:

source: alpha architect

Why do we care?

The analysis above highlights that we are in a rare regime when commodities are the only long asset with a positive trend. The last time this happened we entered a long period of high inflation and poor real returns. Will this happen again? Who knows. But we do know that post-1973 we entered a world where, for several decades (at least up to around 2007), both bonds and commodities were an important component of a diversified portfolio. The recent past has arguably made investors complacent in their reliance on a stock/bond portfolio as an end-all-be-all solution. When history tells us that incorporating commodities into a portfolio probably makes sense from a diversification standpoint.

Stay diversified!


About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.