Considering commodities and commodity stocks in your portfolio
Normally, the economy and the stock market go hand-in-hand. However, that is not always the case. We can experience a bear market without a recession as occurred in 2022, and 12 other times over the past century.
Although rarer, we can also experience a recession without a bear market as occurred in 1990. The fact that economic performance and the market can decouple, at least from a shorter-term perspective, partly explains the stellar performance of TSX in 2025. In fact, I made this prediction for 2025, one of the few things I got correct.
One key reason for TSX outperformance was mining stocks, especially precious metal mines which gained about 150 per cent, with base metal miners up about 50 per cent. Silver gained roughly 150 and gold about 75 per cent. Among the base metals, copper gained 50 per cent, lithium 40 per cent, aluminum 20 per cent, nickel 10 per cent and iron ore was relatively flat.
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Unrelated to commodities, another reason for TSX outperformance was that across the world, financials did well. The TSX has over 30 per cent weighting to financials, whereas they represent less than 15 per cent of the S&P 500.
Canadian bank fiscal year-end is October 30 and shortly afterwards I went through their financial performance. While profits were up on average 12 per cent, their share price increased by an average of 35 per cent, stretching valuation significantly. They are now at decade-high valuation levels relative to earnings. I find it somewhat incongruous that bank valuations are at these high levels while residential real estate values are declining in our largest urban centres. For the first time that I can recall, I sold a small portion of bank holdings.
Some stock investors completely eschew commodity stocks in their portfolios because of their highly cyclical nature, and over time they generally perform worse than the market at large.
I am not such an investor.
Precious metals have zero correlation to the market and can therefore act as a partial hedge. While having an outstanding 2025, they are currently experiencing significant but unsurprising volatility. This would have caused significant stress to anyone who jumped on the overcrowded trade but was a minor hiccup for those of us who always hold a small portion in portfolios. I had hedged part of my holdings through covered calls a few months ago. Until recently, those hedges seemed poorly timed.
There are numerous reasons precious metals performed well over the past year. One is massive buying by the Chinese central bank, as they diversify away from U.S. dollars. Another is what is referred to as the debasement trade, concern for currency devaluation. Why countries try to drive down the value of their own currency is beyond me, yet many countries seem infatuated with this strategy, thinking it will drive up exports and drive down imports. If it truly worked, Argentina and Venezuela would be the richest countries on earth! The Canadian economy was strongest when our currency was at par.
Massive government debts are a key contributor to currency debasement and rarely has government spending been as out of control across democratic nations. Rather than driving economic activity, I view currency as an international measuring stick of confidence in the political leadership and economy of a country. Declining U.S. currency is, however, positive for commodities.
Commodities also tend to be late economic cycle performers, meaning they tend to do well at the tail end of an economic cycle. One of the reasons I have been skeptical of an imminent U.S. recession, as many others have predicted, is we have yet to experience a broad-based commodity surge. Precious and base metals have done well but other commodities, such as oil and grains, are still lagging.
Commodity stocks can provide a lot of torque to a portfolio, if you catch the right wave. Some of my best current holdings are energy stocks purchased during COVID lows. A couple of examples are CES Energy Solutions purchased for $1.44 per share that are currently at $14.65, and Black Diamond Group purchased at $2.59 which now trades over $16.
I continue to believe energy stocks are in the middle innings of their respectability and price recovery. Five years ago, I was a very lonely stock investor discussing energy stocks and while I don’t feel that lonely anymore, it’s still not a crowded dance floor.
The financial industry is always producing new products, and while I am skeptical of most, I ran across a company that has agricultural commodity Exchange Traded Funds, making it easy for an urbanite such as myself to invest in grains. Teucrium has corn (Ticker CORN), soybean (SOYB), wheat (WEAT) and sugar (CANE) funds. Options are also available and are reasonably liquid. Given my agricultural background and my belief that other commodities could easily join the metals in a bull run, I purchased call contracts on CORN, SOYB and WEAT.
Energy or agricultural company stocks can act somewhat as a hedge on your input prices, because they will likely rise in value if commodity prices increase. While I own a generous supply of them, keep in mind they will ride similar commodity waves that you are already exposed to in your everyday farming operations.
If the bull market spreads from metals to other commodities, 2026 could be another year our stock market outperforms the U.S. despite a much weaker economy.
During a 40-plus year career in agriculture, Herman VanGenderen became an active investor in stocks and real estate. His book Stocks for Fun and Profit: Adventures of an Amateur Investor is available on internet book websites. None of the information presented should be considered as investment advice and while significant care is taken, given the variability of the subject matter, complete accuracy is not guaranteed. Please email you1st.stocks@gmail.com with questions/comments.
Source: producer.com