Commodities playing catch up
Stocks were in the spotlight throughout 2017. The broad-based Standard & Poor’s 500 was up 20 percent on the year while big-cap Dow stocks gained 25 percent and the NASDAQ technology index rallied 30 percent.
Investors have entered the new year still wearing their rose-colored glasses, but will they continue to funnel capital into the equity market at the same fever pace in 2018? Some analysts are expecting a slowdown for stocks that may encourage money flows to reroute toward another asset class – commodities.
The commodity market’s recent failings can be traced back to July 2014, when oil prices began sliding lower. The rest of the commodity space would have hard times as West Texas Intermediate crude futures were cut in half by the end of that year.
Part of the reason for lower oil prices was that domestic oil supplies were growing at a rate that far outstripped usage gains. Producers abroad also were pumping oil into the pipeline in larger doses while global demand remained generally sluggish. Most of the rest of the commodities, from metals to grains, were oversupplied at the time.
U.S. oil stocks are still plentiful but have been drawing down from the peak put during the fall of 2016. Global oil inventories have shrunk as Organization of Petroleum Exporting Countries producers maintain a production cut agreement. We are aware of grain supplies still being burdensome but find it difficult to expect global growers to be able to collectively extend the current streak of much-above-trend yields.
Not coincidentally, commodities started moving lower in 2014 while the dollar started its run higher. The dollar-denominated oil trade was hurt by a strengthening greenback, as were the grains, which become more expensive to importers when the dollar firms up.
The dollar started moving up resulting from the changing interest rate expectations. U.S. central bankers were wrapping up quantitative easing programs and began readying the public for rising interest rates, which are normally associated with a strengthening currency.
Down has been the dollar trend as of late. The dollar index – which tracks our currency against the euro, yen, pound, Canadian dollar, franc and krona – is now as low as it has been since January 2015.
Interest rates are rising in the U.S., but not by as fast as earlier anticipated. Other countries also are enjoying improved economic health in a way that also encourages money to rotate out of the dollar and into competing currencies.
The major commodity indices show their values off by about one-third since markets started slipping lower in 2014. The Standard & Poor’s 500 is up by more than 40 percent compared with the same period. Investors may be starting to see the commodity/equity divergence as reason to go bargain hunting in the commodity space.
Commodities have a shot at gaining favor from major investors in 2018 if oil stays strong and the dollar settles back further. Capital reallocation from stocks to commodities would help, probably being the tide that lifts all ships for commodities – grains included.
Camp is the risk management specialist for AgriVisor, one of WFBF’s member benefits.