Stock Markets, Commodity Prices and ‘Legs’

U.S. major stock market indices are continuing to perform astonishingly well.

2017-03-07-Stock-Markets-Graphic

As of February 2017’s closing, the Dow Jones Industrial (DJI) average was +4.8% month over month, +5.3% year to date and +26.0% versus the end of February last year.

The S&P 500 index, as of this year’s February closing, was +3.7% month over month, +5.6% year to date, and +22.4% on an annual basis.

The NASDAQ index, for the same time frames, was +3.7%, +8.2% and +27.8%.

The good news embodied in the foregoing percentage changes comes from just scratching the surface. Delving deeper, the last trough period for all three indices was in February 2009. Since then, the DJI has been +195%; the S&P 500, +222%; and NASDAQ, a breathtaking +323%.

Eight years have passed since February 2009, a stretch of 96 months. The longest run-up in share prices ever achieved, before encountering a ‘bear’ drop of 20% or more, was realized over the 113 months between October 1990 and March 2000.

If the current ‘bull’ market can maintain forward momentum for another 18 months, it will move from second place into first place for greatest longevity.

It’s the ‘long in the tooth’ aspect of the current advance that has many analysts worried.

Will underlying economic variables stay mainly favorable? There are competing arguments to consider.

A major driver of the extended vitality in equity prices has been an extraordinary backdrop of ultra-low interest rates. While there is ongoing uncertainty as to how quickly yields will increase, a new era of at-least-gradual hikes is already underway.

On the other hand, the positive stock market index advances have been achieved despite a relatively prolonged history of ‘real’ (i.e., inflation-adjusted) gross domestic product (GDP) growth that has been below full capacity output.

It is the stated intention of the new administration in Washington to cut taxes and reduce regulations in order to substantially lift annual GDP change to +3.5% or more.

There is a large and readily apparent segment of the economy – the natural resources sector − that is still waiting to get untracked. This undoubtedly has extra significance for countries that have an outsized dependence on the health of their raw materials communities.

For example, since February 2009, Canada’s well-known and widely-followed Toronto Stock Exchange (TSX) has not been able to keep up with its counterparts in America. The TSX is presently only +89.6% relative to eight years ago.

But the TSX at February 2017’s close was approximately +20% both year over year and versus its 52-week low. A major reason for the uptick has been an improvement in global energy prices. Crude oil has risen from a low of $30 USD per barrel to above $50 USD per barrel.

If a better world price of oil can lift the TSX to an eye-catching degree, how much more potential for share prices is there to be found in commodity markets? The answer is ‘plenty’.

The costs of almost all globally-traded commodities are expressed in U.S. dollars. Graphs 2 through 6 show commodity subset indices (based on USD-denominated prices) calculated by the Bank of Canada. The BOC’s data series, − weekly, monthly and yearly, − can be easily accessed through the following URL address: http://www.bankofcanada.ca/rates/price-indexes/bcpi/

The starting point, or base period, for the tracking of the numbers is January 1972. To calculate the indices, actual values in January 1972 have been set equal to 100.0 for each series.

Graph 2 shows that while the BOC’s energy price index − for oil, natural gas and coal − has improved by a seemingly impressive +80.7% over the past 12 months, it has climbed only so far as to now be about on a par with its previous trough level, reached in February 2009.

(The fact that equity prices and the prices for many commodities had their most recent troughs in February 2009 helps to establish that there is a close correlation between the two datasets.)

At 933.5, the energy price index currently sits more than 50% below its most recent peak of 2005.6 achieved in April 2011. Furthermore, it falls 66.5% (or two-thirds) short of its all-time summit of 2,788.6 reached in June 2008, immediately before the onset of the Great Recession.

Graph 3 summarizes agricultural products – cattle, canola, wheat, hogs, corn, barley and potatoes. Over the past several months, the farming products price index, at 212.5, has improved by +11.3%, but it remains 33.7% below its prior best level of 320.4 reached in April 2011.
Furthermore, agricultural prices are barely better now than in September 2009 when they touched their Great Recession bottom at 192.0.

The metals and minerals price index in Graph 4 has similarly taken only a first step or two on the road to sustained recovery. At 521.3, the index for potash, aluminum, gold, nickel, iron, copper, silver, zinc and lead is +9.8% over its most recent low of 474.9 in January 2016. Nor has it gained much upwards separation versus its recessionary nadir of 497.5 in January 2008. And it will need to improve +59.3% to reach the 830.5 figure recorded at its zenith in August 2011.

The forestry commodities price index (Graph 5), comprised of real-world pulp, lumber and newsprint prices, has been the only BOC series to fully recover and to be on the verge of breaking new ground. At a current level of 391.3, it has made a comeback to surpass November 2013’s quite strong 390.9 and it has nearly matched August 2004’s high-point of 394.5.

The forestry commodity’s price index has shifted by +25.0% compared with September 2015’s 313.0 and it is ahead by two-thirds (+67.5%) versus a recessionary low in May 2009 of 233.6.

The total commodities price index in Graph 6, now at 403.6, is +37.5% compared with 293.5 a year ago in February 2016, but it is only +2.5% versus its Great Recession trough level of 393.9 in February 2009. And it will need an additional journey of +83.8% to recapture the 741.8 level it achieved in April 2011 and an even steeper climb of +115.9% to make it back to its 871.4 pinnacle of July 2008.

Setting aside, for the moment, questions concerning the possible negative impacts of increased U.S. protectionism on world trade, if a next wave of improvement in equity prices in the U.S. and elsewhere hangs on how well resources-centric firms perform, then there is still plenty of potential to be realized.

Should such a scenario prove to be true, − whereby rising commodities prices in the months and even years ahead lift the share values of raw materials extraction companies, − the longevity of the current bull market may yet have considerable ‘legs’.

Table 1: Stock exchanges – performances of key indices – February 28, 2017
INDEX 52-WEEK LOW 52-WEEK HIGH YEAR AGO
(FEB 29, 2016)
MONTH AGO
(JAN 31, 2016)
Latest Month-end Closing Prices
(FEB 28, 2017)
  PER CENT CHANGE,

LATEST VERSUS
52-WEEK LOW 52-WEEK HIGH YEAR AGO MONTH AGO
Dow Jones Industrial
NYSE (^dji)
Mar 1 16
16,546
Feb 27 17

20,851
16,517 19,864 20,812 25.8% -0.2% 26.0% 4.8%

S & P 500
NYSE (^gspc)

Mar 1 16
1,937
Feb 27 17

2,372
1,932 2,279 2,364 22.0% -0.3% 22.4% 3.7%
NASDAQ
(^ixic)
Jun 27 16

4,574
Feb 21 17

5,868
4,558 5,615 5,825 27.4% -0.7% 27.8% 3.7%
S & P/TSX Composite
TSX (^gsptse)
Mar 1 16
12,896
Feb 21 17

15,943
12,860 15,386 15,399 19.4% -3.4% 19.7% 0.1%
Sources: New York Stock Exchange (NYSE), Standard and Poor›s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Table: ConstructConnect.
Graph 1: Performances of key stock market indices since most recent trough
Performances of key stock market indices since most recent trough
*Each month’s closing figure vs. the Feb, 2009 closing value for the index. Feb ’09 was the most recent trough for all 4 indices.
The Key Stock Market Indices are:
1) New York Stock Exchange – Dow-Jones Industrial (30);
2) New York Stock Exchange – Standard and Poor’s (S & P) (500);
3) National Association of Securities Dealers Automated Quotations – NASDAQ Composite Index;
4) Toronto Stock Exchange – S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: ConstructConnect.
Graph 2: Energy commodities price index
Total commodities price index
The total commodities price index is comprised of products in energy, metals and minerals, forestry, agriculture and the fisheries. Based on actual prices in U.S. dollars.
Data source: Bank of Canada.
Chart: ConstructConnect.
Graph 3: Agricultural commodities price index
Total commodities price index
The total commodities price index is comprised of products in energy, metals and minerals, forestry, agriculture and the fisheries. Based on actual prices in U.S. dollars.
Data source: Bank of Canada.
Chart: ConstructConnect.
Graph 4: Metals and minerals commodities price index
Total commodities price index
The total commodities price index is comprised of products in energy, metals and minerals, forestry, agriculture and the fisheries. Based on actual prices in U.S. dollars.
Data source: Bank of Canada.
Chart: ConstructConnect.
Graph 5: Forestry commodities price index
Total commodities price index
The total commodities price index is comprised of products in energy, metals and minerals, forestry, agriculture and the fisheries. Based on actual prices in U.S. dollars.
Data source: Bank of Canada.
Chart: ConstructConnect.
Graph 6: Total commodities price index
Total commodities price index
The total commodities price index is comprised of products in energy, metals and minerals, forestry, agriculture and the fisheries. Based on actual prices in U.S. dollars.
Data source: Bank of Canada.
Chart: ConstructConnect.

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