Marc Cuniberti: Commodity markets
December 17, 2017
Since the 2009 crisis, few would argue the stock market's general trajectory has been up. More than tripling since the crisis, the most watched index, the Dow is approaching a quadruple.
Witnessing this historic rise, an observer would likely conclude the economy is firing on all cylinders and business is brisk. But if this is the case, the building blocks of business, commodities, should also be rising.
Instead, something seems amiss in the general price of commodities or perhaps in the metrics that measure them.
The building blocks of manufacturing
Commodities are a commonly traded asset class and when it comes to the simplicity of composition, few things are easier to understand then commodities.
They include food stuffs like soybeans, corn, wheat, milk and sugar among others. Energy fuels like natural gas, oil and propane are consider commodities and well a variety of metals as well as agricultural items.
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Basically it's the stuff that we make stuff out of. One could also conceptualize commodities as the tangible items used in manufacturing.
Since the economies of the world are made of up both service and manufacturing companies both use tangible items in the implementation of whatever they do, if the economies of the world are indeed booming as a rising market would imply, why have commodities basically gone nowhere since the crisis ended almost 8 years ago?
In a Feb. 20, 2017 article by Forbes entitled "Commodities have been down for so long …" author Daniel Fisher, the stark reality of commodities is summed up nicely: "The U.S. Commodity Index Fund, not surprisingly, has a five-year record of negative 8.4 percent a year"
Read that again.
With the Dow standing at 7062.00 Feb. 1, 2009, and recently breaching the 24,000 mark and more, the price comparison between the Dow since 2008 and commodities is indeed baffling.
With more than a tripling of the Dow, one might ask: where have all the commodities gone?
One might conclude apparently not into the companies that make up the stock market.
The possible explanations could be many, but are they convincing?
Is there a glut of commodities and if so, is even possible for every commodity to be in an oversupply condition. Could speculators be keeping the prices down and if so, could they suppress prices for so long over such a wide market?
Could falling currency values reflect lower prices because of price is only a function of the currency it's priced in?
Accepting that would mean accepting a worldwide appreciation of all currencies relative to each other, a nearly impossible scenario that indeed has not been the case.
The demand for stock ownership
The fact that the stock markets of the world have been headed in a concerted upwardly direction since 2009 is baffling enough, but for commodities to be going in the opposite direction almost the entire time is even more mysterious.
What may be the root of this mystery might be some unpalatable explanations of a stock rally that is fueled by something else besides basic demand. Either that or the rally is fueled by demand but not the kind of demand that consumes commodities, but by the demand of stock ownership.
In other words, stocks are rising because investors simply want to own stocks. Additional demand could be also coming from the companies themselves buying back their own shares.
Another explanation could be the easy money and low interest rate policies of the last eight years by central bankers, which is flooding the world with paper dollars, and those dollars are chasing stocks.
Whatever the causes for this unrelenting rise in markets, one thing stands out: the commodity markets could be telling us there is more to this eight year rally than meets the eye.
This article expresses the opinions of Marc Cuniberti and our opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. He can be contacted at MKB Financial Services 164 Maple St #1, Auburn, 530-823-2792. MKB Financial Services and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. The referenced indexes may not be invested in directly. This is not a solicitation to buy or sell securities. Investing involves risk and you can lose money. Past performance is not a guarantee for future performance. Consult a qualified financial advisor before making any investment decisions and do your own research before investing.
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