September 18, 2024
The Biggest Bargain on Wall Street
Dear Subscriber,
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| By Sean Brodrick |
Earlier this week, gold hit a new high. And while gold is up 18.6% year to date, it’s not even the best-performing commodity.
Silver is up 22.3%, coffee is up 50%, orange juice is up 62.76% and cocoa is up a whopping 403%.
Some people might think, “If we don’t already own commodities, we’ve missed the boat.”
To which I say, HECK, NO!
The recent bullish action is just a blip after years of underperformance. And plenty of commodities — natural gas, corn, even gasoline — are still down for the year.
The fact is this commodity rally is just getting started.
My friend Frank Holmes of U.S. Global Investors sent me a chart worth sharing. It’s a chart of commodities (as tracked by the S&P Commodity Index) divided by the S&P 500 over the past 54 years.
You can say that stocks are overvalued, and maybe they are.
The S&P 500 was recently trading at 27.45 times earnings. That’s up 17% in a year. Also, the S&P 500’s typical historical P/E range is lower, between 20 and 25.
Then again, things that are expensive can get pricier.
That chart tells me that commodities are the biggest bargain on Wall Street. Especially with the Federal Reserve moving into a rate-cutting cycle.
See, commodities don’t pay interest. So, when interest rates are higher, bonds look much more appealing than commodities.
When interest rates are lower, money tends to rotate out of bonds and into hard assets.
And as of last week, the market was pricing in nearly 240 basis points of cuts to the Fed’s benchmark rate. That means along with the cut the Fed is making today, those cuts should keep coming well into 2025.
Broadly speaking, those rate cuts should shift many commodities into overdrive.
I’ve talked about gold and silver before. And I will again. There’s a big bull market going on in precious metals. And my subscribers are making the most of it.
But what Wall Street is missing — for now — is that the broad commodity space could rally much higher … and rally hard.
That would be inflationary. And a real kick in the teeth for a Federal Reserve that thinks it has inflation licked.
But there’s an old saying on Wall Street: “The main purpose of the stock market is to make fools of as many men as possible.”
2 Ways to Play This Rally
An easy way to play this rally is the iShares S&P GSCI Commodity-Indexed Trust (GSG). This ETF tracks a basket of 24 different commodities.
You can also buy the iShares U.S. Basic Materials ETF (IYM). It’s stuffed with stocks that are leveraged to commodities of all types. These companies include Freeport-McMoRan (FCX), Air Products & Chemicals ( APD) and Newmont (NEM).
Here’s a chart showing how the GSG and IYM have performed compared to the S&P 500 over the past year.
The S&P 500 has been on a tear, up 26.79% in the past year. At the same time, the IYM was up only 12.31%, while commodities, as tracked by the GSG, were down 9.03%.
That commodity performance is just what I would expect at the tail end of the cycle I showed you in the first chart.
As interest rates go down, commodities should ramp up. I’d expect the stocks in the IYM, leveraged to those same commodities, to do even better.
Interestingly, the IYM trades at a price-to-earnings ratio of 19.3. That makes it cheaper than the S&P 500 on a P/E basis.
Again, commodities are cheap. And the stocks leveraged to them are cheap, too.
But if this interest rate easing cycle plays out like previous cycles, commodities won’t be cheap for much longer.
All the best,
Sean
P.S. Before I let you go ahead of today’s massive Fed meeting, I have one more item to share.
My colleagues here at Weiss Ratings have been busy. After an exhaustive, million-dollar search, they uncovered one small company with the best chance to become the next “stock of the century.” Here’s the full scoop.
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