Classical models of market activity hold that there are predictable cyclic rotations in the equity markets. We are familiar with the overlapping sine waves of market segments as they progress through their stages of growth and decline. In broad brushstrokes, as leading industries such as financials mature, we would expect to see robust economic activity in industrial and consumer stocks as the economy improves. As this happens, the demand for raw materials can be expected to increase, hence raw materials such as copper and other metals advance in price. Typically, there is also upward price pressure in all manner of consumer commodity products including food.
The recent emergence of significant virtual companies has thrown some of this classic modelling to question. Much of the stock markets’ gains can be attributed to the tremendous growth exhibited in companies that don’t create a tangible product as compared to a generation ago when for example, car production or home construction was a measure of economic robustness. While the consumer certainly spends money on iPhones, Netflix, or Spotify, the tangible economic benefit does not reflect as directly in statistics on American employment or production. In the case of Apple computer, much of their production benefit accrues to factories outside of the US. One significant exception to this may be TSLA, whose impact on the American manufacturing environment may be just building.
The classic relationships of the various market cycles have been somewhat distorted, but that doesn’t make them obsolete or irrelevant any more than the change in the Transport index over time makes the Dow Theory irrelevant. Shown below is a chart illustrating the relative movements of select market sectors.
We’ve made mention previously of the activity in the stock market, specifically the skewing of the Dow Jones because of both AAPL and MSFT. This is evident when we observe the orange line showing the S&P versus the cyan line showing the Nasdaq performance over 9 months. We want to point out the quiet bull market that has been taking place in the metals markets as shown by the purple, green and pink lines representing copper, gold and silver respectively. Even if we disregard the sudden spike in silver, we can see that these markets have outperformed the S&P over the past half year and especially since the March selloff.
The very odd statistic is the measure of the CRB index which is the standard indicator of inflationary pressures. This line has been subdued but especially since the March selloff. So despite the buoyant activity in the precious and industrial metals, consumer commodity prices have barely budged. This indicates that the economy is not super heated and that rampant inflationary pressures are not at work. Does this mean the consumer is not participating? Not at all. As the chart below shows, consumer discretionary spending has surged with the stock market since the relative collapse in March.
So we’re not seeing a retraction in consumer spending versus consumer staples. The continued low interest rate environment is supporting the habits of the spending consumer. But thus far, it has not resulted in a crowding of prices for normal consumer commodities such as food. The movement of gold and silver are likely more due to the decline of the US dollar as a result of low interest rates than because of price inflation per se. As we’ve stated from the beginning, buying relative strength is the best strategy for deploying investment assets. In the case of metals, they continue to look strong. I expect that copper, an industrial commodity will begin to accelerate as economic conditions continue to improve. In expectation of continued activity in this space, we will likely see buoyant activity in the smaller cap issues as well as the standard large capitalization ones. Many such issues will be found on the TMX Canadian markets and it’s there that some enormous opportunities will emerge.