Whenever we see big moves in different key commodities, we always like to look at how the pricing relationship between them and equities has shifted. With crude oil back near its recent lows, gold hitting new multi-year lows, and the S&P 500 right near all-time highs, previous relationships between these asset classes are shifting fast to levels not seen in several years.
The biggest shift has been in crude oil where the S&P 500 is currently trading at 42 times the price of a barrel of crude oil. This is more than double the levels it was at a year ago as well as more than twice the long-term average of 21.7 going back to 1990. More importantly, prior to the last few months the current ratio between the S&P 500 and crude oil hasn’t been this high in more than a decade.
While the ratio of the S&P 500 and crude oil is at a multi-year extreme, the ratio between the S&P 500 and gold is not nearly as stretched. The S&P 500 currently trades at 1.93 times the price of an ounce of gold, which is 23% above its average of 1.57 going back to 1990. That being said, the current ratio is still high relative to recent history as you have to go all the way back to the early days of the Financial Crisis to find the last time the ratio was higher.
Looking at the charts above, the ratio between the S&P 500 and oil and gold has followed similar patterns over the last several years. One reason for the similarity is that both oil and gold are inversely correlated to moves in the dollar. Therefore, the dollar’s rally has negatively impacted the price of these two commodities which has driven up the ratio. While there has been a fair amount of debate over whether or not the dollar’s rally is good for the equity market, our stance has been that a strong dollar is good for US stocks. While the domestic/international breakdown may not be as lopsided as it was 20 years ago, US companies still import more than they export, so the benefit of better terms of trade regarding imports still outweighs the negative hit to exports.