Chart of the Week

Escalations in the Middle East conflict have fueled sharp swings in energy prices, with West Texas Intermediate (WTI) crude futures jumping above $100 per barrel on September 10 for the first time since May of this year, before pulling back. Yet the bigger story may be diesel, which has surged to record highs and is putting upward pressure on everything from transportation costs to food prices.

Refined products are used across crucial areas of the economy, including transportation, agriculture, construction, and manufacturing. As prices for fuels rise, costs can increase across supply chains and contribute to higher inflation. Since 1971, the Bloomberg Commodity Total Return Index has performed best during periods of elevated inflation. The chart shows that the index generated average year-over-year returns of 10.5% when inflation ranged between 2% and 4%, with even stronger returns when inflation exceeded 4%.

We remain favorable on Commodities and believe they may offer a potential hedge against renewed inflation risks as constrained energy supply and refining bottlenecks continue to pressure prices higher.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Investing in commodities is not appropriate for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.

Bloomberg Commodity Total Return Index reflects the returns that are potentially available through an unleveraged investment in the futures contracts on 19 physical commodities comprising the Index plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. The Index is a rolling index rebalancing annually.

Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

An index is unmanaged and not available for direct investment.

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The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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