Stock and Commodity Cycles
Stocks and commodities have historically moved in opposite directions. Each asset class typically has a 16-18 year bull market followed by an equally long bear market.
Being aware of these cycle patterns and understanding where in the cycle you are will give you great insight. Long term investors attempt to buy into these long bull market cycles early and ride them out until the end.
You don’t have to be a genius to make money in a bull market. Simply buying an index can give you great return in bull market cycle. The bull and bear stock market, commodity cycle shows remarkable consistency with a bull market in stocks and commodities taking turns every 16-18 years on average.
Each cycle during the 20th century has displayed similar characteristics.
1906 – 1923.
1929 – 1949.
1950 – 1965.
1966 – 1982.
1982 – 2000.
2000 – present.
Bull markets in stocks generally end with a crash followed by a commodities boom. The cycle is loosely around 18 years from boom to bust.
The current commodity super-cycle can be dated back to 1999. The major commodity indexes all hit their 20 year lows that year or in late 1998. Without doubt China and emerging market demand have been the drivers of the great commodity boom. Very low interest rates, thanks to the world’s central banks have made it attractive to own commodities in anticipation of inflation down the track.
Riding the commodity dragon with cheap money has been the name of the game.
China’s latest number are sobering, there has been a mark down in growth and trade partly caused by domestic policy changes but also because of weakness in Europe. Recent comments from BHP and Rio Tinto confirm a slowing of forward orders.
If China is slowing, and we expect it is, the question is one of term, or how long for? We don’t know, and neither does anyone else, we have to watch the numbers as they are released.
If commodity demand is softening what about the other factor, that of interest rates.
Federal Reserve Chairman Ben Bernanke is famous for having said that the Fed expects that abnormally low interest rates should start rising in late 2014. But fed funds futures indicate rates will rise sooner than that, perhaps as early as mid to late 2013.
As we have listed above, there have been three periods in the past 80 years where periods of ultra-loose US monetary policy have coincided with upswings in the commodity-price cycle. These were the 1930s to the 1940s, the late 1960s to the 1970s, and the current period beginning in 1999.
As we noted earlier commodity cycles, tend to coincide with equity bear markets and last between 15 and 25 years. The current commodity cycle could run out of steam as early as 2014, bearing in mind that cycles are not an exact science.
One thing we expect is that commodity prices will have turned down well before official recognition of changes in underlying supply and demand for raw materials.
Author: Stephen Jennings
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