🔋The Bear And Some Rocks
🔋The Bear And Some Rocks
History implies this massive change is happening in markets.
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Stocks
The last real bear market for stocks was the financial crisis which took place from July of 2007 to the bottom in March of 2009. The COVID crash took less than half a year to bounce back and the 2022 correction was only 25% before reclaiming new highs, a far cry from some real bear markets in the past. Even for buy-and-hold investors, it was fairly easy to make money in stocks over the last 16 years. In the meantime, energy prices and inflation were non-concerns that hardly warranted a second thought. Stock market corrections and bear markets are often coincident with recessions but often fail to foretell want weaknesses in the underlying economy. From It Hertz, “Even though the stock market is on a tear thanks to the magnificent 7, leading economic indicators (LEI), gross domestic income (GDI), the inverted yield curves, high interest rates, and low consumer savings all point to weakness in the economy and looming recession.”
The harsh truth is that forward returns on the stock market are in bubble territory, with levels only seen during 1929 and 1999 which preceded 90% and 50% corrections respectively. Conversely, many commodities hit extremely oversold levels in 2020. No better example was oil in which futures prices went negative in April of 2020. While the world economy was shut down, this marked a pivotal bottom in the price of oil and other commodities that are essential to the global economy.
Commodities
Looking back in history, oil has steadily increased mostly within a rising trend channel that can be seen in the figure below (log price on the y-axis). This is partly due to the diminishing supply of the commodity but also the devaluation of the unit of account, in this case, the US dollar. Using trendlines, we can visualize peaks and troughs in the oil price historically. While they are a rudimentary technical analysis tool subject to interpretation, we can use them as a historic map to see how overbought/oversold commodities are.
Oil: is the lifeblood of the economy, used in transportation, heating, petrochemicals, and more. Typically, tagging the bottom trendline is followed by a decade-long bull market which terminates once it has made a new peak above the upper trendline. While two data points aren’t statistically significant, the long course of history may suggest that we are well on our way to higher oil prices off of the 2020 trough.
Sugar: an agricultural commodity like cattle, corn, soybeans, and wheat. Extending the bottom trendline hits a fourth point in 1967 not visible in this chart. Sugar saw insane price spikes in the 70s, but has typically also risen to the top line following a tag of the bottom trend line similar to oil.
Copper: an industrial metal alongside aluminum, zinc, nickel, etc. Known for its higher-than-average correlation with economic activity, copper has a similar trendline with room on the upside.
Gold: a precious metal similar to silver and platinum which differ where there are generally fewer industrial uses. The gold price was fixed for many years by the US government before the gold standard was officially severed in 1971. It is easy to make the case for further upside in gold technically as well.
Since commodities are scarce, they tend to store value better than the US dollar which has become less valuable over the long run due to inflation. Over the long term, the average yearly appreciation is about 4.8% which is similar to the long-term trend of stocks going back to 1897. After the 1950s, this rate for stocks approached 6-7%, matching the average increase in the money supply.
Recently, assets like the stock market and real estate have grown at faster rates than their historic trends, and much more than their underlying commodity prices. This shouldn’t come as a surprise for anyone who has seen their house appreciated or been astonished at price tags on some homes. Another tool is to look at the relationships between different sectors. We can look at the price of the stock market vs the price of oil or any other commodity index to see the relative relationship. We are currently in the middle of the range, coming off tagging the upper trend line in 2020.
At certain times in history, stocks are expensive relative to commodities like in 1929, 1999, and 2020. These are coincident with very overvalued stock markets. Other times stocks have been cheap relative to commodities, for example, 1921, the early 80s, and 08/09. These all characterized fantastic buying opportunities for stocks that went on massive decade-long bull markets.
Conclusion
These trends suggest that this decade will be commodities time to shine, not the stock market. This contrarian view could come in the form of lower stock prices, higher commodity prices, or both. This supports fundamental work about the current over-valuation of the stock market as well as fundamental supports for commodities like de-globalization and resource requirements. While these are long-term views, anything can happen in the short term. It is possible to have a recession that brings down commodity prices further as well as another blow-off top in the stock market before the core themes I’ve described become self-evident. Playing the status quo is betting against history and not how this decade will play out in my view. Natural resources and real assets will be the darlings of the decade rather than the expensive financial assets of today. Until next week,
-Grayson
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There seems to be an inevitability to some kind of big reset with asset prices so overblown. But if the stock market drops precipitously, as history would suggest, we could have a severe depression in spending which keeps commodities low priced (like the 30s era), as you say. If however the Federal Reserve prints cheap money to stimulate (2000, 2008,2020) then commodities and inflation can soar. Which of course will deepen the deficit even more and cause some kind of additional implosion at some point too to resolve that unsustainable strategy. Greenspan did us no favors by throwing cheap money out in 2000 (causing the first housing asset peak). I'm not sure Obama shouldn't have just let he system collapse in 2008 instead of bailing everyone out. Bernanke studied the Great Depression and came to the conclusion that all we needed to do was provide cheap stimulus to avoid serious downturns. But look where it's gotten us, $35 trillion in debt and growing!