It is pretty self evident that commodities and stocks move in the same direction. If the global economy is booming demand for oil, copper, agricultural commodities and other industrial metals rises – producing higher prices. If the global economy is booming corporations are generating higher profits, which lead to higher stock prices. Pretty simple.
It seems the central bankers, politicians and corporate titans of the world thought they could overcome the laws of supply and demand. They thought adding $50 trillion of debt, dropping interest rates to zero, and buying back stock could defeat the laws of supply and demand.
Not gonna happen. Commodity prices have fallen 45% since 2011 and are now in free fall. They are far lower than they were at the 2009 crisis lows. Look very closely at the chart below. What do you think happens to stocks next?
Will global markets follow commodities off the cliff?
From 1970 to 2004, commodities moved the opposite direction of assets like equities and bonds. For example, it was during times such as the 1990s that cheap inputs like oil and metals helped to fuel growth in industries across the globe.
When the oil price spiked, like in instances such as the Iranian Revolution and the subsequent Iran-Iraq War in 1980, the market reacted accordingly. In that particular case, inflation jumped to 11.3% in 1979 and 13.5% in 1980, a US recession was triggered, and many economic sectors were hit hard.
However, as we see in today’s chart, from 2001-2012 commodities (as measured by the Bloomberg Commodities Index) have more or less kept in line with the S&P 500. This is historically unusual and many analysts expected it would not last. In 2012, commodities diverged in a big way.
Gold and silver were the first to drop off. More recently, it was base metals and oil that fell off the cliff because of slowing growth in China and supply gluts. Today, the Bloomberg Commodity Index and the TSX Venture Composite Index are lower than they have ever been since their inception. The former is down -19.9% from the beginning of 2001. The Venture is down -40.1% since then.
Today may be the end of this trend of divergence. US equities are at a precipice: fueled by low rates and quantitative easing for years, they have finally started to tumble from record highs. Yesterday, the Dow had its largest one-day drop since April 2014 as it slid 350 points. Even tech darlings were down as $49 billion in market capitalization was wiped out, with Apple, Google, Netflix, Facebook, and Twitter all getting crushed in trading yesterday. Market sentiment is decidedly worse than it has ever been in recent years with the tailwinds of Greece, Puerto Rico, China, and other problems.
Making predictions are the dumbest possible idea, but they say that fortune favours the brave.
So here are some bold predictions:
Gold will at least hold its current value, if not see gains in the upcoming six month. US equities do not see sizable gains for awhile. The Fed does not hike rates in September (or if they do, it will be to a lack of fanfare from the markets). Industrial commodities like base metals will continue to drop off a little further as the overall market feels like it has lost momentum and supply gluts remain supreme.
The commodities are the lit fuses and it won’t be many days until the stocks start going boom boom.
Commodities drop because people stop buying them (which is, of course, highly significant).
Stocks and other financial instruments drop because people are selling them to take their money out of the markets.
Figure out where they are putting the money they are taking out and you’ll figure out the next big gainer investment to put yours into.
Of course, if you’re in the markets in such a manner that you can’t just liquidate on demand you’re plain and simple screwed as others who aren’t in that situation make the money you lose.
Again one needs to ask “WHERE’S OUR F#%KING SAVINGS”. Condos, cars, coffee pots and condoms should be getting cheaper. And everything made with anything.
I am so tired of hearing how big screen tv’s and computers are cheaper and THAT explains it.
People are paying $300 per month for phone service that used to cost $15. Granted, you didn’t carry the phone around with you, but so what.
“Again one needs to ask “WHERE’S OUR F#%KING SAVINGS”. Condos, cars, coffee pots and condoms should be getting cheaper. And everything made with anything.” Oops, that was me. So solly.
phoolish,
You can still get that “$15” service.
You just don’t get data plans and iPhones and such with it, you just get the same service you originally got for it at that price).
I have a landline and it actually costs me a bit less than it did 30 years ago while I get more with it at the same time (caller ID, call forwarding, etc. without extra charges).
AFAIK copper wire has a higher transfer rate, in mbs than cable or fibre.
only the blind could not see this train wreck, only had years to get prepared. the Fed with all their bullshit bernake magic can not fight gravity. pump and dump, one problem we own the dump, the pumpers are seeking out suckers, this is just a correction, no big deal. i call blood in the streets when the DOW hits 5000 then i may look for that boat i lost in the middle of the lake. good time to check out safety harness.
We’ve already gone through this in the industries I’m in. Oversupply, underdemand. Didn’t work out well for most. 75% of my competitors are history, and of the ones still standing, most are walking dead. Lean and mean is the only game plan with any viability, nowhere to go but up. Get ready, the re-industrialization of theUS will be the economic opportunity of our lifetime. Don’t snooze.
No more roller coaster. Sales up. Sales down. Sales up… ad infinitum.
At one time the biz contained up to 30 employees. The parking lot was mostly full, including customer parking. The only thing plentiful in the lot now are weeds growing in the cracks.
The plant floor is now quiet. You can hear a bolt drop from across the end.
The warehouse is still half full, but at least the the remaining product is moving ever so slowly. Enough to keep the lights on and the bills paid. For how much longer? Who knows?
The front offices are a dismal place now. The front counter where up to six order clerks bustled around, the outer office/waiting room, the accounting office, even the receptionist, all gone now.
There’s the telephone answerer, who’s also the shipper/receiver (although there’s nothing to receive), a lady book keeper who comes in one day a week, a couple of kids who sweep up and clean windows once a week, and the “Jackass” who owns it, whom you never see!
Yup. We are in a recovery. Any day now. Just you watch. Here it comes. Still waiting………
You forgot one.
If things were booming here the demand to borrow would be high and interest rates would be high not low.