The stock market saw a spectacular bull run after the pandemic lows hit in 2020. Tech stocks, meme stocks and anything involving cryptocurrency surged higher on the backs of Fed support and stimulus checks.
But over the last six months there has been a shift out of what was working. The hot stocks of the past decade have been sold aggressively, leading the S&P 500 to its worst first half in over 50 years.
Investors have instead avoided the names that usually make the news and piled into commodities.
Whether it’s stocks that deal in the commodities, or the underlying commodities themselves, they were being snapped up aggressively since Q4 2021.
But the possibility of a recession has increased, which has caused a big pullback in the names that were surging just a month ago.
Now investors are asking…
Is there more meat on the commodity bone and how does one buy?
The Case for Commodities
1) Inflation – If you follow the markets, you may be familiar with the staggering year over year inflation numbers that have posted lately. Economic stimulus measures were enacted to fight the COVID pandemic, but these policies have unfortunately led to the 7-9% inflation we have been seeing.
This is inflation that hasn’t been seen in 40 years!
The best place to be when inflation hits is hard assets. Your house is one way, but a lot of other goods you use on a daily basis give you exposure as well. Oil, gas, wheat, lumber and steel are just a few examples.
Prices in almost every commodity have gone up this year, so investors might feel they are too late. However, the companies that deal in these commodities are just printing cash and their stocks look attractive after the broad market sell off.
Think oil and gas names, fertilizers, gold miners and steel producers. These companies will see margins and profits increase as prices do. And with that, the stock price will head higher as well.
2) Russia and Ukraine – It’s hard to tell how long the Russia/Ukraine Conflict will last and there are a lot of moving parts as to how it may end. What makes this war different from other recent conflicts is that we have some of the biggest exporters of commodities essentially being cut off from global demand.
This creates massive supply constraints on a global scale that has sent prices higher. Some of the biggest exports for these two countries are wheat and energy. Crude oil and gasoline have both spiked higher on the news and held their gains. While wheat surged 60% higher after the invasion, it has since pulled back very close to pre-invasion levels.
3) Supply Chains – For two years, the pandemic prevented a big percentage of the global population from living their normal life. In the early stages, global demand for commodities was turned off and prices tumbled.
Producers adjusted, by lowering their output as commodity prices dropped. But as global demand came back, commodity producers were slow to adjust, unsure if COVID would come roaring back.
At the moment, most of the world is free from the hassle of COVID. However, shutdowns over the years have clogged supply chains. The demand for goods is creating an environment where consumers are driving prices higher for goods that aren’t immediately available. Demand destruction is yet to be seen with these higher prices and while supply chains are improving, the relief on prices seems far away.
