Be Wary of Rising Commodities Prices
Robert Ross|October 22, 2024
I received a great note from one of our readers after my essay on October 8, titled “This ‘Clock’ Says It’s a Good Time to Invest“…
Thank you. I’m tired of the sky is falling doom and gloom. It’s nice to have a breath of fresh air for a change. – Subscriber I.S.
Most of the investment commentary you read these days likely has a bearish angle. They’ll delve into the implications of yield curve inversions, the SAHM Rule, or which political candidate is better for the markets.
I am not worried about any of these things. And while most signs point to us being relatively early in the economic cycle, I’m not doing you or my portfolio any favors by ignoring red flags in the market…
And there’s one that should be on your radar.
Staying Bullish Has Been the Right Move
Most of you know I have a cautiously optimistic view on stocks.
That’s been the right move for the last 24 months. And I’ve been bullish the entire way up, telling my 500,000 social media followers in October 2022 that stocks likely bottomed after the S&P 500 rallied after a hot CPI print.
I doubled down on this stance in early 2023 by saying we were are the start of a new bull market. This was despite everyone from Elon Musk to Jamie Dimon saying a recession was looming.
And as we entered 2024, when Wall Street had their lowest expectations for the S&P 500 in a decade, I told you to stay long the market.
While I’ve been consistent in my outlook over this period, a few odd things have happened since the Federal Reserve cut interest rates 50 basis points.
An Unusual Reaction
When the Fed cuts rates, we generally expect U.S. Treasury yields to fall in line. It’s a fundamental move by the central bank to stimulate growth – lower yields translate to lower rates on mortgages, car loans, and other consumer credit. But this time, things are playing out differently.
Since the rate cut on September 18, the 10-year Treasury yield has jumped from 3.74% to as high as 4.17%.
Mortgage rates have followed suit… and that’s not great news for equities.
Remember, higher bond yields have historically triggered market pullbacks, as we saw in both mid-2023 and mid-2024. Higher yields increase the opportunity cost of holding stocks, making bonds more attractive.
Now, here’s where it gets interesting…
Commodities are also rallying. In fact, gold has been the best-performing asset in the world in 2024…
At the same time, oil is rising rapidly thanks to unrest in the Middle East…
While base metals like copper, nickel, and aluminum are at or near their highs for the year.
This combination of rising bond yields and commodity prices is a red flag.
As we saw in late 2021 and early 2022, when commodities rise, it often points to higher inflation. Companies face increased costs on raw materials like oil and metals, which ultimately trickles down to the consumer, driving inflation.
That’s why this rally in commodities, while profitable, has me cautious for what comes next.
The Fed Must Thread the Needle
The Federal Reserve now faces a tricky challenge.
Typically, the playbook says to cut rates in order to lower borrowing costs and boost the economy. But when inflation expectations surge due to rising commodity prices, the Fed could be forced into a tough spot. They might pause rate cuts or, worse, hike rates sooner than anyone anticipated.
This might explain why U.S. Treasury yields are rising instead of falling. The market seems to be pricing in higher interest rates… not lower.
Just last week, there was a 0% chance of no rate cuts at the next Fed meeting. Those odds have jumped to 22%. Meanwhile, the market had been expecting a 50-basis-point cut by November, but the bond market clearly has a different idea.
And here’s the weird part: it’s the bond market leading the Fed, not the other way around.
With Treasury yields climbing despite rate cuts, I’m adding more commodity exposure to the Breakout Fortunes portfolio. But other than that, I’m not yet making any drastic portfolio changes.
But I will be watching the 10-year Treasury yield closely. If it keeps rallying, we could be in for a weaker period for stocks.
If my outlook shifts, you’ll be the first to know.
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
