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Commodities Hit Multi-Year Lows

PantagesThe Bloomberg Commodity Index dropped to a 13 year low. Oil continues to weaken and closed at $48 per barrel. ISI thinks retail gas prices could decline to $2.55 from the recent peak of $2.80. That’s the national average of course, as us folks in Alaska are currently stuck paying about $3.45 per gallon. Goldman Sachs warned that copper demand could reach decade lows as Chinese usage slows. Gold fell below $1,100 an ounce (recall it was almost $1,900 only just a few years ago).

The truth is that commodities have not been a particularly good long term investment. We own them in some portfolios (and are underweight by about 50%) as protection against unexpected inflation spikes, which can drive down stocks and bonds. They have been hurt of late owing to falling Chinese demand, supply gluts, and a stronger dollar. Since commodities are priced in dollars on world markets, a strong dollar makes them even more expensive for buyers in other countries and demand falls.

The S&P 500 lost -2.2% this week closing at 2,080. The tech heavy NASDAQ came off a new all-time high of 5,218 reached last Monday to close at 5,089, down 2.3% over the week. Bond yields fell a dime to 2.26% on the 10 year Treasury.

Bloomberg reports that 187 of the companies in the S&P 500 have reported 2Q earnings, which are up 3.2% YoY so far. It’s +4.5% ex-energy. Positive surprises (earnings “beats”) stand at 71.5% of the companies that have reported so far.

A number of technology companies posted disappointing Q2 results including Apple, Microsoft, and Yahoo! But Google, Amazon, and GM handily beat analysts’ expectations.

Signals on the economy while improving from the first quarter still seem mixed. If you look at employment everything is fine, but retail sales while steady, have been lackluster. If you look at housing prices all is well but commodities are collapsing and corporate earnings while up, are slowing. Perhaps this is why U.S. stocks and bonds have been up and down in a narrow range since the beginning of the year?

While new home sales fell in June, sales of previously owned U.S. homes climbed to an eight-year high as momentum in the residential real estate market accelerated. The median price of an existing home rose 6.5% from June 2014 to $236,400. The median time a home was on the market was only 34 days.

Next week we get a bunch of data including an estimate of second quarter GDP. Analysts expect +2.5% growth compared to -0.2% in the first quarter. That Q1 number might get adjusted upwards owing to a revised seasonal adjustment process out of the BEA.

Also on tap next week is the Federal Reserve’s FOMC meeting on WednesdayNo chance of a rate hike but we are getting closer. Economists put the odds at around 50% for a September increase in fed funds. It would be the first hike in 10 years. Amazing.

On the political front we have the media glued to the “Donald” looking for some outrageous sound bite that will lure readers or viewers to click or watch I suppose. Meanwhile, Hillary Clinton is proposing a hike in the capital gains tax on investments if held for only a few years. Current law taxes capital gains at 20% for investments held longer than one year. The new proposal would only affect taxpayers in the highest marginal bracket and would step the capital gains tax down from 39.6% to 20% over a period of 6 years.

Heading into the last few weeks of the Alaska baseball league. We are off to see the Miners play the Chinooks this evening in Palmer.

Jeff Pantages, CFA®
Chief Investment Officer

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