Published May 20, 2022
Do you remember a couple of years ago in the height of Covid fear when the price of oil went negative? The global economy shut down. The world was suddenly awash in oil. And there was no place to store it. Nobody wanted the excess oil barrels. Holders of oil had to pay someone to take the excess off their hands – a negative oil price. Things have dramatically changed since then as the price of oil has skyrocketed to as high as $130 per barrel.
As the chart above shows, oil prices are very volatile, with no fewer than three massive (50%+) plunges over the past 15 years. Prices routinely move around by +/- 20%.
But it’s possible there is a longer-term trend change afoot here. The energy sector has been leading this market since the turn in November. The chart below compares the Toronto stock market index – heavy in energy and commodity-related stocks – with the S&P 500. A downward sloping line means that the S&P is outperforming – namely, that the technology and consumer-oriented stocks that drive the S&P are doing better than the commodity-oriented stocks in the Canadian index. An upward sloping line means commodities are outperforming. As you can see on the chart, throughout the decade of 2000-2010, commodities outperformed. 2010-2021 has been the time to invest in technology and consumer stocks – e.g. Apple, Microsoft, Amazon and other FANG and Nasdaq stocks. The chart suggests we are at an inflection point where commodities are back in the driver’s seat.
The chart below delivers the same message, this time comparing the commodity index with the Nasdaq 100 (QQQ). We know the transition has been very sharp, just as the rise in tech/consumer stocks through the latter half of 2020 and throughout most of 2021 was accelerated. We don’t have a lot of trend changes like this to work with. However, taken together, these two charts suggest that commodities could outperform for years to come as tech/consumer stocks take a breather from their “blow-off top” in 2021. We can also note that the last time commodities were king, it was a bumpy ride, which makes our long/short approach more critical in navigating the markets.
The bear kept rolling through the market this week knocking over previously safe defensive sectors like consumer staples as any remaining investor optimism took another hit. Monday brought another round of mild selling to tech/consumer shares with the Nasdaq giving back -1%. The tech/consumer sectors, carrying many high-growth stocks, have been hammered as interest rates have quickly and sharply risen. Rising rates have run into recently heightened fears of a coming recession to completely sap investor enthusiasm. Relatively strong corporate earnings have done nothing to dampen the selling with investors usually seizing on any hint of corporate caution to unload shares. However, Tuesday brought a burst of optimism from investors with indexes rallying +2%. A solid retail sales report combined with strong inflation-fighting rhetoric from Fed Chair Powell and an upbeat outlook from United Airlines (UAL) to bring buyers into the market. By contrast, Walmart (WMT), which had recently been one of the market’s better-performing stocks, sold off -11% on earnings news. The one-day investor happiness was blitzed Wednesday. Target (TGT) echoed Walmart’s warnings of a shift in consumer spending away from goods while higher prices are eating into retailers’ profit margins. Target found its stock pummeled -25% on the day while Walmart saw a second day of heavy losses in its shares. The selling spread to previously untouched consumer heavyweights like Procter & Gamble (PG) and Coca-Cola (KO), both of whom had issued solid earnings reports recently. Stock indexes got crushed, losing -4% and approaching the -20% threshold that defines a bear market. Stocks suffered again Thursday with earnings from Cisco Systems (CSCO) providing new fodder for the bears. Retailers continued to, by and large, get hit due to disappointing earnings. The S&P slid a modest -0.6%. Friday found the S&P 500 sliding into bear market territory with the Nasdaq tumbling yet again, lopping off another -3% as tech/consumer bellweather, and the market’s largest stock, Apple (AAPL) let go of a key support level (at $140). In a clear example of the rampant and extreme pessimism afflicting markets, Deere (DE) posted rising sales and profits AND raised their profit outlook. The stock was still pounded down -14% Friday. As if waiting for stocks to cross into bear market territory, once that threshold was breached buyers swooped into stocks in the final hour Friday to lift the indexes all the way back near breakeven. Of note, interest rates logged their second week of declines as investors finally move money into bonds perhaps on the notion that inflation has peaked. Also noted is the first down week for the U.S. dollar as the flight to safety bid might be easing. Both of these suggest stocks might find some buyers soon, if only temporarily.
Investors suffered another week of heavy selling with indexes now reaching a modestly oversold state on a weekly basis. It was the seventh consecutive week of losses for the market. The S&P 500 (SPY) dropped -3.01%. The Nasdaq 100 (QQQ) plunged -4.39%. Smallcap stocks (IWM) held up relatively well losing -1.12%.
Warm wishes and until next week.