Although the markets have demonstrated in the first half of this year that not all commodities are created equal, this might be a good time to give them a closer look. Generally speaking, commodities tend to be cyclical in nature, and trends can last for a number of years. Historically any hint of inflation can be a springboard for higher commodity prices.   

Right now, the global growth story and the pickup in inflation are two key components to the move in the overall commodity sector. In the case of crude oil, traditional supply and demand factors created by direct measures (such as capacity constraints) and geopolitical uncertainty in areas including Russia and the Middle East, have led to stronger prices. To further validate that demand continues to exceed current supply, the crude oil futures curve remains in backwardation, which is a sign of higher demand relative to current supply.

On the upside, oil (particularly crude) has been one of the top performing commodities YTD. And although the petro story has been a good one thus far in 2018, there may still be short-term pullbacks along the way as shown by the last few weeks. The fear of OPEC bringing more supply onto the market has created a recent move lower. However the longer term prospects continue to signal more upside overall. If oil prices remain at these levels or move higher, stocks within the energy sector should get a continued tail wind. Energy stocks have lagged their commodity counterparts for some time now, and this might represent an opportunity to take advantage of this current differential.

In the case of the agricultural markets, we are starting to see some green shoots. Grains have started out of a significant long-term downtrend, and may be a major component in the resurgence of the commodity asset class over the next few years. Coming off a period of consolidation, corn (which has been down in price for five straight years) and soybeans are trading in the tightest price range in over a decade. 

Global demand in grains continues to increase as a number of emerging markets, most notably China and India, look to increase their standard of living. China trade tensions might create short-term volatility, and the direct impact would be felt most likely with soybeans, as they are more susceptible to export partners and the strengthening U.S. dollar.   

On the flip side, precious and base metals (particularly gold, silver and copper) are lagging as a group. In regard to metals, this group has lagged thus far in 2018. The strengthening U.S. dollar combined with rising interest rates have been somewhat of a deterrent to gold and silver prices. In the case of industrial metals like copper, the strength we saw in 2017 and the first quarter of 2018, are likely to reemerge as global infrastructure spending ramps up.  

From a longer term standpoint, when allocating to commodities look for a broad commodity basket investment that can be tactical in nature. As recent performance shows, all commodities may not rise in unison, and it’s important to have a strategy that is disciplined and has the ability to get defensive with individual commodities.          

The commodity markets are possibly in the very early innings of a long-term uptrend. When looking at the current valuation of commodities relative to the S&P 500, even with this recent rally, commodities are still roughly the cheapest they have been in almost 50 years.

The time might be now to start riding the commodity wave.

Ed Egilinsky is managing director and head of alternative investments at Direxion Investments.