MyraP. Saefong

Markets/commodities reporter

SAN FRANCISCO (MarketWatch) — U.S. equities outperformed commodities this year by a long shot, but commodities have a good chance to regain investor favor in 2014 after three consecutive years of declines.

“Something has got to give in 2014,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago.

As the investing game draws to an end for the year, the near final score is: commodities down roughly 9%, based on the Dow Jones-UBS Commodity Index XX:DJUBS The Dow Jones-UBS Commodity Index Total Return Exchange-Traded Note DJP, -1.32% has lost 10% year to date. The S&P 500 Index SPX, -0.95% on the other hand, has surged 25%, on track for its best year since 2003.

“Based off historical norms, either stocks are way too high or commodities are way too low. The odds are high for either a massive commodity rally or a rather large stock market selloff,” said Flynn.

This year will mark a third year in a row in which commodities have underperformed U.S. equities. Including 2013, the Dow-Jones UBS Commodity Index has fallen for each of the last three years, as the S&P 500 Index scored significant gains over the past two.

“The biggest story in the markets in 2013 to 2014 is commodities against stocks as an asset class,” said Flynn.

“There has been an under-investment in commodities and usually that has consequences,” he said. “It normally creates an environment where tight supply emerges. [and] the cost of production and the low prices mean we may not see the investment we need to meet demand.”

So commodities and equities are poised for “some major moves in the coming year,” Flynn said.

Big moves and lessons learned

This year’s action for commodity prices and equities was already one for the record books.

The DJ-UBS Commodity Index has never posted declines for three years in a row, based on FactSet data going back as far as 1991, and the S&P 500 Index is poised for its biggest yearly gain in a decade.

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“It’s difficult to compare to prior historical periods because commodities really hadn’t become popular among institutions and retail investors until recently,” said Arvin Soh, a portfolio manager at GAM, which has over $120 billion in global assets under management. Still, “it is often the case that sustained outflows are a contrarian indicator and indicate an improving environment.”

This year has also seen commodity funds shut down or return capital and that’s likely to happen next year as well, he said. That’s “potentially positive because there is less capital invested in the space.”

But the path for commodities can be “bumpy and outflows can persist for longer than one would rationally expect,” Soh said. “Capital leaving the space will translate into a better environment, but it could still be quite some time before that occurs.”