The S&P 500 to Commodity Index ratio just hit another all-time high, tripling over the past three years. Since the 2022 bear market, U.S. stocks have soared while commodities collapsed.
The S&P 500 has surged by 71%, while the Commodity Price Index, which tracks energy, metals, agriculture, and fertilizers based on global trade weightings, has dropped 31%.
The ratio hasn’t looked this stretched, not even during the Dot-Com Bubble. Some commodities are now sitting at levels investors haven’t seen in decades.
This extreme divergence has pulled attention back to raw materials, which have taken a beating while equities hit record highs. The index blew past its 2020 pandemic peak and never looked back.
According to Wells Fargo Investment Institute, the setup is a wake-up call for anyone still chasing stock rallies without considering portfolio risk.
Wells Fargo tells investors to dump small caps and switch into quality bonds
Paul Christopher, head of global investment strategy at Wells Fargo, said in a Tuesday note that investors should begin pulling back from equities.
“Even as the S&P 500 Index makes new all-time highs, investors may want to trim equity allocations to position portfolios ahead of the volatility we expect in the coming weeks and months,” Paul wrote. He warned that shocks could come from either policy decisions or economic surprises.
The S&P 500 broke above 6,500 for the first time on Thursday but closed lower on Friday. Paul told CNBC the recent strength in stocks justifies reducing exposure in certain areas. He’s sticking with large-cap tech, still keeping an overweight in information technology, but he’s taken profits from communication services and small-cap stocks.
The adjustment keeps the overall structure at 60% stocks, 40% fixed income, but the mix within each side is changing.
He added exposure to financial stocks, calling them a beneficiary if the Federal Reserve goes ahead with interest rate cuts. “If short-term rates are going to fall and the economy is going to slow, that means that the yield curve is going to steepen,” Paul said.
“If you’re a bank, that’s a good situation for you, because now your cost of deposits — on the short end of the yield curve — has gotten cheaper, so you’re paying less money to your depositors. On the other hand, the long-term yields that are, which is what you earn from your loans, those rates are staying more or less steady.”
He sees growing pressure on the Fed as President Donald Trump, now back in the White House, looks to place loyalists on the Federal Reserve Board. Trump’s attempt to remove Lisa Cook, one of the sitting board members, is currently in court. Paul said the bigger concern is structural.
“The fear would be if the Fed does become a creature of the administration, of any administration, Republican or Democrat… then there’s always going to be pressure on the Fed to ease as the government wants to borrow more, and that would be inflationary over the longer term.”
Paul advised investors shifting into bonds to focus on intermediate-term, high-quality assets; specifically investment-grade corporates and municipal bonds.
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