Stocks may lag bonds if commodities keep on surging

Given that the past couple of months has seen the outbreak of war in Ukraine, surging commodity prices, growing concerns about inflation, and increasingly hawkish noises from the world’s major central banks, it is not surprising that US Treasuries have sold off since the publication of our Asset Allocation Outlook on 31^st January. More surprising is that US equities have continued to climb over the same period. While our base case is that US equities will continue to outperform Treasuries over the next year or two, we doubt that they will outperform quite as emphatically as they have done in recent months. Indeed, if commodity prices continue to rise – driving inflation higher still – we think there would be a real risk that US equities ultimately underperform Treasuries. That was the experience during the first oil price shock in the early 1970s. While US Treasuries outperformed equities during the second oil price shock in the late 1970s, a key difference between the two periods is that the valuation of the S&P 500 was much higher at the onset of the first crisis. That might mean that the early 1970s shock is a more informative period when thinking about the risks to our forecasts.