Commodities have been discovered by the masses in recent years. Rediscovered is probably the more accurate description, since raw materials were formerly all the rage in investing circles in the 1970s and through the first half of the 1980s. The fact that Wall Street and Main Street are finding reason anew to embrace a broad mix of commodities is arguably a more-strategic move this time around, courtesy of the widely publicized data that show the diversification power of adding commodities to a portfolio of stocks and bonds.
But some worry that the diversification value of commodities may fade over time as more and more investors climb on the bandwagon. One way to monitor that diversification value is by watching the correlations of returns between commodities and other asset classes, primarily stocks and bonds. On that front, there’s reason to wonder if the price of popularity is starting to take a toll.
Consider that the rolling 36-month correlations between stocks and commodities have been rising sharply for more than a year, as the chart below illustrates. The correlations between commodities and bonds have been rising recently too, albeit with less drama.
