Among the not-so-fun events to come from 2022 market performance are the following: the worst year on record for the Bloomberg US Aggregate Bond Index, the third-worst year ever for the 60/40 portfolio, and one of the worst years since the Great Depression for the S&P 500. However, 2022 wasn’t a wash for all asset classes. Just look at commodities.
The widely followed S&P GSCI returned 26% last year. Alone, that’s impressive, but it’s even more so when considering that gold notched a negative annual showing, though the yellow metal did perform significantly less poorly than bonds and equities.
That marks a second consecutive year of outperformance by the S&P GSCI, and while past performance isn’t a guarantee of future returns, many of the factors that drove commodities higher over the past two years remain in place in 2023, including high inflation in the U.S. Energy was one of the primary contributors to the 2022 commodities rally.
“It is not surprising that the energy complex enjoyed the strongest performance across commodities markets in 2022, with the S&P GSCI Petroleum rallying 44.6%. Oil prices surged in March as the Russia-Ukraine conflict disrupted global oil trade flows, but prices reversed in the second half of the year as recession risks multiplied. At the end of December, Russia delivered its long-awaited response to the Western price cap, announcing that it would ban the supply of oil and oil products for five months to countries that are party to the cap, starting on Feb. 1, 2023,” according to S&P Dow Jones Indices.
It is noteworthy that commodities delivered for investors against the backdrop of a strong dollar. Helped by seven interest rate hikes by the Federal Reserve, the greenback was 2022’s best performing major currency. That should have been be a drag on commodities, which are denominated in dollars, but it wasn’t.
“With the USD posting its biggest annual gain since 2015 and interest rates rising, it was no surprise that the yellow metal had a lackluster year. The S&P GSCI Gold ended 2022 down a little less than 1.0%. That said, gold performed admirably in the final few months of the year on expectations that the U.S. Fed could begin to scale back the pace of its interest rate hikes, strong central bank purchases and the ongoing challenges in the cryptocurrency ecosystem,” added S&P.
Said another way, forecasting more upside for S&P GSCI this year is tricky, but gold has potential on the basis of the Fed not being as aggressive as it was in 2022 and potential dollar weakness.
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