Is the recent pullback in commodities a sign of things to come?
As you can see from the chart below, commodities are the only major asset class that’s in the red over the past month, through August 29. Although commodities are still up on the year, they trail most of the other asset classes. Only inflation-indexed Treasuries and U.S. bonds have delivered lower year-to-date gains than commodities.

Asset class proxies: Vanguard REIT ETF, iShares Russell 2000, iShares MSCI Emerging Markets, iShares MSCI EAFE, S&P 500 SPDR, Vanguard High-Yield Corporate, PIMCO EM Bond, Morningstar Ultra-Short Gov’t Bond Category, PIMCO Foreign Bond, iShares Lehman Aggregate Bond, Vanguard Inflation Protected Securities Fund, Credit Suisse Commodity Return Strategy Fund.
Predicting turning points in investment cycles is difficult, if not impossible, and quite often dangerous if investors go to extremes based on their expectations about the future. The risk of bailing out of an asset class completely has been on display recently by way of REITs. Some pundits (including yours truly) have worried that the REIT bull market is long in the tooth, and so a correction of some duration and magnitude looked probable. But as the record shows, REITs haven’t suffered much of a correction, at least nothing that comes close to looking like a sustained bear market.
If fact, REITs have continued to make new highs. So much for predictions.
Deciding if commodities will continue to deliver stellar gains, or something less isn’t any easier than forecasting when (or if) REITs will hit the wall. Such is life in the prediction game.
But while we hold no illusions about our (or anybody else’s) ability to discern what’s coming, that doesn’t stop us from making calculated bets in adjusting our asset allocation from time to time. And that includes paring back on asset classes that have run up while adding to those that have fallen on hard times.
To be sure, an enlightened approach to diversification is a bit more complicated. Valuation and macroeconomic factors should play role in rebalancing decisions too. But the analysis starts with comparing performance over a variety of time frames. By that standard, we’re inclined to pare back on REITs and emerging market stocks. Alas, the game gets tougher for deciding where to redeploy the capital. Having no good choices (i.e., compelling valuations are in short supply at the moment) at our disposal, we’re forced to make the least worst decision, which for us has been one of taking some money out of cash and putting it into short- and medium-term bonds and equivalent funds.
No, we’re not smitten with bonds. In fact, we’re not smitten with any of the major asset classes. That doesn’t stop us from owning some of each. But better days surely lay ahead for asset allocation opportunities. One or more of the asset classes, we expect, will emerge as convincing buys. We’re not sure when that will happen, or which asset classes will make the grade. But the opportunities may come sooner than many expect. And it is that rationale that continues to convince us to hold an overweight in cash.