Commodities Prices vs. Commodities Stocks
New paper explores how both perform during bull and bear markets.
BY Caroline Cakebread | April 2, 2014
With a slowdown in global economic growth and, specifically, in China, investors are watching keep a close eye on the performance of commodities, especially in Canada, where economic growth is closely linked to demand for oil, gas and other commodities. Which is why a new paper by Christos Ntantamis, Department of Economics, Mount Allison University and Jun Zhou, Rowe School of Business, Dalhousie University is particularly interesting. The two academics decided to focus on the relationship between bull and bear markets in commodity prices and commodity stocks – is there any relation and if so what does that mean for investors.
The paper, “Bull and Bear Markets in Commodity Prices and Commodity Stocks: Is There a Relation?”, piqued enough interest to win the 2014 Canadian Investment Research Award presented by CFA Society Toronto and Hillsdale Investment Management.
Said the authors, “The motivation for the paper came after observing significant buzz in the main stream media that questioned the performance of commodity stocks in view of increasing commodity prices. When we checked the academic literature to find results on how prices of commodities such as oil and gold affect stock prices of firms engaged in their production, we found mixed results. We thought that instead of focusing on the direct relation between prices, we could investigate the relation between the bull and bear markets of commodity prices and commodity stocks.”
Among their key findings:
• Commodity market phases tend to have longer durations compared to stock prices.
• Commodity prices exhibit longer bear phases compared to bull phases, whereas the opposite is true for individual stocks.
• There is little evidence that the markets identified for the individual stocks are related to those for the commodity prices.
• Commodity price markets allow us to partly forecast the markets for their respective stock market sector indices and the aggregate stock market.
• A possible cause for the lack of relationship is the company’s idiosyncratic risks that create a wedge between changes in the underlying commodity prices and changes in the stock price. This effect disappears when we aggregate individual stocks.
You can download the full paper here.