The prices of commodities like (oil, gas, gold and silver, and others) have never been so low compared to US stocks since 1971. Due to the new monetary policy of central bank of united states, stocks and bonds begin to rise, but due to weak economic growth of usa, prices of important commodities like oil have been under pressure over the last couple of years. Meanwhile now gold and silver are also struggling to break the downward trend of recent years.
In relation to the S&P500, and GSCI commodity index is currently trading at the lowest level in 50 years.
. The GSCI commodity index comprises 24 commodities from commodity sectors and serves a benchmark for investment in the commodity market and a measure of commodity performance over time. If ratio is low (green circles), it means that commodities are cheap relative to stocks and shares. If the ratio is at a high level (red circles), like during Gulf Crisis in 1990,The price of raw materials are relatively expensive.The current ratio is about 0.87 while the median is at about 4.1. A return to the median gives 371% potential, but in most cases a rally doesn't stop at the median. Markets usually evolve from one extreme to anothers. From cheap commodities to expensive commodities. Just look at the rally between 1999 to 2008.
.Stocks verses Commodities
Based on both comparison, we can calculate commodities are currently relatively inexpensive, or US stocks are currently overvalued now. Or both. Either way and, history teaches us that extreme valuation like this never last forever. While it's not a good timing for indicator it does show that this ratio will need to regress back to the mean. The last time stocks were relatively expensive compared to commodities was betwen the dotcom bubble of the late nineties. We know that didn't end very well for the stock markets and traders...
Are stocks Now overvalued?
Yes Today, US stock markets are at record High levels again, while the economy is still recovering from the previous crisis During Trump presidency. Shares are valued as if companies are going to make even more profits now, while meanwhile US jobs growth is slowing down more and the expansion of the world's largest economy remains stuck around the about 1% level.So the big question is how justifies the high stock prices of today?