INVESTORS SEEKING markets uncorrelated to the stock market may look to commodities.
Commodities are the raw materials that are either consumed or used to build other products. From orange juice to cotton, oil and gas to gold, commodities take many forms.
They are an alternative asset class to stocks and bonds. Commodities are generally uncorrelated to these traditional asset classes, but that's not always the case. In the current bear market environment, stocks are down because of a global recession. That's hit demand for many industrial commodities – such as crude oil and copper – pulling many commodities indexes lower.
However, other commodities are rising. Take gold, for example, which traditionally acts as a safe haven when traditional markets fall.
Roland Morris, portfolio manager and strategist with VanEck, says whether commodities rise when traditional assets fall depends on the reason why traditional assets are down.
"If it's like the 1970s, when there [was] inflation and strong nominal growth, then commodities are the only thing you want," he says.
But the current situation is deflationary because of the decline in economic activity, he says. However, Morris notes that investing during a bear market can position buyers for future gains when demand snaps back.
"Because of the demand shock, a lot of production is being shut down," Morris says. "Meat-processing plants have shut down production; farmers don't increase their herds, so it sets up a cycle where the whole sector is undersupplied at some point."
