What is the commodity-to-equity ratio?

The commodity-to-equity ratio measures the relative performance of commodity prices versus stock market prices, typically calculated by dividing a broad commodity index (like the CRB or BCOM) by a stock market index (like the S&P 500). When the ratio is rising, commodities are outperforming stocks; when falling, stocks are outperforming commodities. The ratio has historically exhibited long-duration cycles lasting 10-20 years, reflecting fundamental shifts in the global economy.

From roughly 2000 to 2008, the ratio rose dramatically as China's industrialization and urbanization created an unprecedented commodity demand boom while the tech bubble burst had deflated equity valuations. The ratio peaked during the 2008 commodity super-cycle high. From 2008 to 2020, the ratio declined persistently as central bank monetary easing inflated financial assets while commodity overinvestment and slower Chinese demand growth kept commodity prices subdued. The post-2020 period has seen a partial ratio recovery, leading some analysts to argue a new commodity cycle has begun.

The ratio captures a fundamental tension in the global economy between financial assets (which benefit from low rates, abundant liquidity, and financial innovation) and real assets (which benefit from physical scarcity, infrastructure underinvestment, and strong industrial demand). Extended periods of financial asset outperformance tend to coincide with disinflation, globalization, and accommodative monetary policy. Periods of commodity outperformance tend to coincide with inflation, supply constraints, and tighter monetary conditions.

For asset allocators, the commodity-to-equity ratio provides a framework for strategic tilting between asset classes. When the ratio is at historical extremes (commodities very cheap relative to stocks, or vice versa), mean reversion tends to assert itself over multi-year horizons. The arguments for a new commodity cycle include: decade-long underinvestment in mining and exploration, the energy transition creating new metal demand, deglobalization reducing supply chain efficiency, and potential for sustained inflationary pressures. Whether these forces are sufficient to reverse the long post-2008 trend of equity outperformance remains one of the most consequential questions in macro investing.