The "Big Divergence" between equities and commodities

There has been a significant divergence between commodity and equity markets. We have looked at the Ten year period for the MSCI world index, the S&P 500, and the DJUBS commodity index. The pre-crisis period showed that the markets moved in tandem with commodities moving ahead of the equity indices late in the cycle. The markets moved together during the decline and moved together through the initial recovery. The fourth quarter of 2011 showed the beginning of the divergence with 2012 and 2013 showing a continued move in opposite directions. The high correlation of the earlier periods have fallen part and commodities decided to march to its own drummer. 

The difference with the S&P 500 becomes very apparent on  a relative basis. These markets are not correlated and have different driving factors.

The real story has been the strong movement in emerging markets over the last ten years. The increase in prices is orders of magnitude higher. On a relative basis commodity prices look tame over the this period. we will not that the strong increase in EM equities is related to the strong demand for raw materials. 

The divergence between emerging markets and commodities relative to the S&P 500 was significant. Commodities matched the US stock market until the end of 2011.

The more recent performance shows that emerging markets and commodities are now more tightly bound together. This binding between emerging markets is not seen in world equity markets which have fallen relative to the S&P 500 but have still outperformed commodity markets.

The end of the financial crisis has caused commodity markets to move more closely with supply and demand for the individual markets within the commodity index. With slower global growth commodity markets are more subject to supply shocks which have been the hallmark for the current commodity environment.