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Crunching Commodities

The precipitous decline in commodity prices has taken its toll on profits and investments for some U.S. companies. The Bloomberg Commodity Index, which tracks a basket of 22 raw materials ranging from oil and aluminum to copper and corn, fell to its lowest level in 16 years in late August 2015 amid concern that slowing growth in key markets such as China could curb demand and intensify supply gluts.1

But not all sectors that deal in commodities feel the same pain—and some might not feel much pain at all. There are a lot of commodities out there, not all of them relevant to every sector, and the effect of falling prices isn’t uniform.

Investors who trade on “conventional wisdom” when commodity prices tumble may end up exacerbating losses or missing good buying opportunities, says Brad Sorensen, Director of Market and Sector Analysis at the Schwab Center for Financial Research. “It’s more important for investors to look into what’s causing the drop in commodity prices and what it may mean for their investments.”

“Investors should focus on the supply/demand picture for longer-term movements and investment decisions,” he says. “Signs of stabilizing commodity prices can create opportunities to add exposure to beaten-down industries.”

Brad points to energy and mining stocks, both of which have been hit hard by plummeting oil and metals prices. Evidence is starting to surface that supplies, especially of crude oil, are becoming better aligned with demand. While Brad says he doesn’t expect a “V-shaped” rebound for either sector, firmer prices could create buying opportunities.

At the same time, persistently low commodity prices could help other sectors. For example, consumer staples companies may benefit when the costs of raw materials fall. And though you might not expect it, technology can also benefit from cheaper commodities. “Some companies in the energy and agriculture sectors have ramped up their technology investments in order to keep producing at lower cost,” Brad says.

1Ranjeetha Pakiam and Rakteem Katakey, “Commodities Slump to 16-Year Low on Mining, Oil Stocks.” Bloomberg News, 8/23/2015.

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Important Disclosures

The Bloomberg Commodities Index is made up of 22 exchange-traded futures on physical commodities. The commodities are weighted to account for economic significance and market liquidity.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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