By Jeff Reeves
It has been quite a run for commodity stocks in 2016.
The best performers in the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.24% year-to-date include a host of energy and materials names, including
Newmont Mining Corp. /zigman2/quotes/205356474/composite NEM +1.21% , a copper and gold miner up about 125% since Jan. 1
Oneok Inc. /zigman2/quotes/205201756/composite OKE -0.83% , a natural gas pipeline company up almost 85% since Jan. 1
Range Resources Corp. /zigman2/quotes/205059849/composite RRC -1.89% , a small oil and gas producer up roughly 70% since Jan. 1
While the resurgence for commodity stocks easily could have been written off as simply a dead-cat bounce this spring, the continued outperformance of miners and frackers since then seems to hint that this is more than just a short-lived trend.
Yes, investors have had their hearts broken by commodity stocks in the past. And yes, serious concerns about demand and pricing remain — and in the middle of earnings season, that matters more than ever.
But an increasing number of investors are piling into miners and energy stocks with an eye on more than just short-term potential.
And there’s good reason why.
The supercycle swings both ways
In January, the Bloomberg Commodity Index — a benchmark of almost two dozen different natural resources — bottomed out at its lowest point since 1999, with a nearly 70% decline from its peak before the Great Recession.
All across 2015, we heard about the clear end of the so-called commodities “supercycle” that had featured rising prices alongside rising demand across the late 1990s through the financial crisis, and how those days were long gone.
But let’s be clear: While comparisons from peak to trough make good headlines, they are just plain hysterical. Yes, it’s true that crude oil /zigman2/quotes/209726633/delayed CLU26 0.00% plummeted from above $145 a barrel in mid-2008 to a low in the mid-$20s in February. But if you believe in the so-called supercycle, you have to look at the flip side — the potential for oil to rally more than 1,000% as it did from short-lived lows near $12 a barrel in 1998 to the pre-crisis peak.
Why should we believe that oil’s rally is now finished just because it has snapped back and stabilized, when history shows there’s so much more potential?
Perfectly timing the ride up or the ride down is, of course, a fool’s errand. But it seems generally true that we are much closer to the bottom of the commodity price cycle than we are the top.