Why rally in soft commodities could be sign of recovery: Orion Advisor Solutions CIO

Orion Advisor Solutions Chief Investment Officer Rusty Vanneman joins the On the Move panel to discuss the latest market action amid COVID-19.

Video Transcript

ADAM SHAPIRO: To help us understand what is happening with markets, we invite into the stream Rusty Vanneman. He is Orion Advisor Solutions Chief Investment Officer, joining us from Omaha, Nebraska. It is good to see you again. It has been too long.

RUSTY VANNEMAN: Nice to see you, Adam and Julie.

ADAM SHAPIRO: So let's start with this news. And I want to start with something we saw first out of "The Wall Street Journal" this morning, which is that we're seeing a recovery in soft commodities-- cocoa, coffee, sugar, cotton, all surging to prices we haven't seen since mid-March, or even before the pandemic. Is this signs of recovery? And where does it take us?

RUSTY VANNEMAN: I think it could be. I think those are one of the many factors that are supporting the commodities. A weaker dollar is also supportive. And there's a lot of reasons for a weaker dollar. A weaker dollar generally means stronger commodities.

Commodities are also just beaten down. And in this world of there are no alternatives besides the stock market, there is. There's actually the commodity market. And I think relative valuations support it. Just improving economics support commodities, rising inflation expectations. There's a lot of reasons why I like commodities right now.

JULIE HYMAN: Rusty, it's Julie. It's good to see you, too. There is a commodity, of course, that has been rising. It hasn't been beaten down at all. And that is gold, at least until today. Because today, gold's on pace to have its biggest drop in, I think, seven years, as we are seeing a little bit of risk appetite come back on.

With everyone crowding into gold, it seems as though there is that kind of risk of then people kind of going to the other end of the boat when you get positive news. Does it still make sense to hold gold as a hedge or a means of diversification?

RUSTY VANNEMAN: Well, when we build portfolios, we really are long-term, globally diversified managers. And so gold, I think, does deserve to be discussed as part of the strategic allocation. Short-term, the chart has just gone parabolic.

And you're right. It's an overcrowded trade. By many measures, it's really overbought. Quite frankly, it's just very natural for it to pause, consolidate, retrace a little bit.

In fact, I mean, just looking at data, the gap lower this morning-- I mean, even a gap like this on the gold market. The gold market, generally speaking, one and three months down the road is still generally higher in the past. But it trades very technical. And I think it's very-- again, very normal and natural for it to pause and consolidate and retrace a little bit.

BRIAN CHEUNG: Rusty, it's Brian Cheung here. I want to ask about the point you just made about diversification. It seems like there has been a lot of interest across the board, many types of investors, in getting into many different types of asset classes. But it seems like the run up has been pretty universal across those asset classes up until today, at least, in gold, in other types of commodities, in the stock market at large.

Is it too expensive for people to be getting in? And if not, where are the pockets of opportunity to invest at this time?

RUSTY VANNEMAN: Well, it's really been tough in recent years to be a globally diversified manager. But I think-- I mean, diversification is on sale. And outside of the S&P 500 and your large-cap growth stocks, the big tech names, I mean, there's a lot of different asset classes and sub asset classes that have relative valuations that are really, really attractive.

Just within the US stock market, small caps look like they have significantly higher potential than larger companies. We've been seeing an outperformance from smaller companies over the last month. And again, we've seen this rotation before. And there's been head fakes.

But it really seems like there's a good chance that value stocks, small cap stocks, cyclical stocks could all do better in this environment, in addition to real assets, such as commodities and natural resource stocks.

ADAM SHAPIRO: So getting back to that first question I asked you about regarding commodities, I know you're watching inflation. Where are you seeing inflation right now? Because it seems like the only place for real return is in equities.

RUSTY VANNEMAN: Yeah, and you're right. Well, I mean, I think key numbers to watch will be, of course, the traditional inflation numbers. And we've already seen inflation expectations, market-based expectations already rise. We now need to see the actual data start to move higher.

The PPI numbers this morning did come in much higher than consensus. Of course, I think it's a long ways to go still. But I think you have to-- you'll have to see in the traditional numbers as well.

BRIAN CHEUNG: Rusty, so on inflation, what was interesting to me was that it seemed like the number was a surprise on the upside, if we're talking about the PPI. So I'm wondering why would that be a reason for gold to then fall? How do we see that dynamic? Because if gold is an inflation hedge, shouldn't the number going up incentivize a more bullish argument for gold, I guess?

RUSTY VANNEMAN: All else equal, you're absolutely right. But, of course, there's so many factors that go on each and every day in every single market. And if I had to say about the gold market, the gold market is really overbought, really overextended.

And I think another data point today-- and, again, I'm longer term, so I don't want to read too much into short-term numbers. But I think another big number this morning was small business optimism, again, substantially improved. And I think that's been a sort of a background fear of bankruptcies.

And I think with small business owners thinking that they have a better chance of survival one year out than they did before, I think that's just a lot of optimism. I think that's the reason why we're seeing smaller companies, the value stocks do better today. Gold has-- you know, there's a lot of reasons for gold to move higher. Inflation expectations are definitely one of them, but also a hedge versus the economy and the market.

So I think one factor supporting gold today sort of came off. And again, I think that is there's just been a little more optimism on the economy.