Weighing Alternatives Ahead of the Election

Weighing Alternatives Ahead of the Election

With the US Election less than two weeks away, 48% of investors believe that markets are underpricing the risk of a contested election.[1] Still the S&P 500 is only 3.5% off all-time highs, suggesting that by-in-large investors continue to favor stocks.[2]  

One possible explanation for continued strength in the stock market is that market participants believe that “there is no alternative.” Rock bottom interest rates and low yields are keeping investors away from bonds and cash. The result is an “un-loved” equity bull market where money continues to move into stocks; not because stocks offer a particularly appealing valuation, but because stocks look better relative to bonds and cash. 

However, there are alternatives. The cliché “there is no alternative” (TINA is the acronym) is simply wrong. Today’s investor is not confined to the traditional asset classes of stocks, bonds, and cash. Google the term “alternative investments,” and see over 345 million results generated in 0.45 seconds!

Examples of alternative investments include Private Equity, Real Estate, and commodities. Investors may do well to consider a variety of alternative investments; however, here at Teucrium, our expertise is in commodities. We believe that there is a strong case to be made for including commodities in a diversified portfolio. Furthermore, agricultural commodities are particularly interesting given increased global demand, weather concerns, and trade complications relating to the COVID – 19 pandemic. 

Agriculture In Your Portfolio

We believe that agricultural commodities can be part of a portfolio’s overall commodity allocation. Many investors with whom we speak are looking to commodities as an inflation hedge. When facing the threat of inflation many investors instinctively flock to precious metals (primarily gold and silver). However agricultural commodities may also stand to benefit given that a weaker dollar historically has provided a tail wind for grain prices (see our June 24th note: Dollar Weakness : Think Grains).

Historically Low Correlations to Equities (Lower than Gold)

Corn, wheat, soybeans, and sugar, historically all have low correlations to the S&P 500. In-fact, over the last 20 years these four agricultural commodities have offered lower correlations than that of gold. A properly diversified portfolio will include investments that zig when others zag. Traditionally, bonds would zig when stocks zagged, yet in recent years we have witnessed both stocks and bonds falling simultaneously during market corrections. On the other hand, the GSCI Grains index has outperformed the S&P 500 in 10 of the last 11 stock market corrections of 10% or more. This relative outperformance has delivered the benefits of diversification when it mattered most, during stock market corrections.

People Need to Eat

As you can see during the latest stock market correction in the chart above, the GSCI Grains Index outperformed the S&P 500 Total Return Index by 29%. This outperformance was led by wheat for one simple reason: people need to eat. 

In March 2020, the world was in the throes of the COVID-19 pandemic and markets were collapsing. There was a clamor for a broad swath of consumer goods ranging from food to toilet paper. Wheat prices benefited directly from the surge in food demand. While consumers ran to stock pastas, bread and flour, governments focused on procuring and protecting wheat supplies. Russia, the world’s largest wheat exporter, put in place a grain export quota raising concerns among the world’s wheat importers. By March 24th, spot wheat prices were up nearly 4% on the year, while the stock market was down over 30%.

At the time there was plenty of wheat in the world, as there is today. Still, the pandemic has exposed the vulnerability of countries dependent on food imports, such as China. The Chinese have stepped up their commodity purchases across the board in recent months in seeking to bolster their domestic supply (see our July 17th note: The Chinese Are Buying US Corn – And a Lot Of It).

11,000-Year-Old “Alternative” Investment

Wheat, an 11,000-year-old alternative investment, is outperforming the S&P 500 Total Return Index YTD

Chart Created by Teucrium Using Bloomberg Finance LP on 10/23/2020

W 1 Comdty vs SPXT Index Date Range 12/31/2019 – 10/22/2020

Trade concerns, resulting from the global pandemic, have been supportive for wheat prices. As we near the US Election and winter in the northern hemisphere, wheat market participants are now pricing in supply concerns as well. Dryness in Russia and Argentina combined with a La Nina Pattern look threatening to global wheat production (see our September 28th note: Watch Wheat).

Humans likely began trading grains as early as 9,000 B.C. some 11 millenniums before the Dutch East India Co. issued the first paper stock. As we near the election and investors mull over stocks and bonds, debating between allocations of 60/40 or 40/60, they should remember that there are viable alternatives. Investors looking to reduce risk and increase returns might consider allocating to investments with low correlations and upside potential. Grains may present the opportunity investors are looking for. 

[1] BofA Global Research, Rates and FX Global October 9, 2020

[2] S&P 500 Index as of market close 10/22/2020