With the S&P closing higher for the month of March, this marks the 5th consecutive month of market gains. When this happens, future gains 12 months down the road are actually quite normal. Almost 93% of the time the market is higher, with an average return of 12.5%. But market returns are not equally distributed. The current bull market was led by tech last year, which advanced around 40%, but we are starting to see technology companies take a back seat to companies with hard assets. Companies that produce oil, materials, and other commodities have moved into favor as inflation and interest rates remain stubbornly high. Over the last month, as money has rotated into the energy, utilities, and materials sectors, market gains in those areas have greatly outpaced gains in technology, healthcare, and consumer discretionary funds.
Consumers are still feeling the strain of high housing and food costs and are less willing to spring for new gadgets as they were a couple of years ago. With high inflation comes high commodity prices (and vice versa), and the effect can be seen and felt all over the place. The main pressure point for people is at the gas pump, but anyone that’s had to fix a fence or get a new one feels it too as lumber prices have nearly doubled. And now cocoa prices have gone parabolic. Last year a metric ton of cocoa cost about $2,400 and today it’s around $10,000. Some say all this is the fallout from the fiscal stimulus during Covid, but whatever the driver is money is on the move.
Apple has been the darling of the market for a decade, but over the last 4 months it has quietly lost over half a trillion dollars in value as investors have rotated out of the tech giant and into other areas. Half a trillion. For perspective, there are only 13 companies in the world worth over half a trillion dollars. Sure, Apple can make a comeback, in fact we have no doubt that it will. But when something of this size takes place, it catches your attention and begs to question why. The bottom line is that this is 2024 and things that worked great in the past may not work as well in the near future. Sector rotation is a perfectly normal and healthy part of a bull market and correct positioning can help augment gains and dampen losses. The entire market may rise boosting portfolio gains, but catching the niche that is moving the fastest and highest is always the objective, especially if there is a larger secular trend afoot.
It is much too early to tell, but commodities and commodity companies may be poised for much greater gains relative to the overall market in the years to come. At different times in history different types of companies make up the largest stocks. Just ten years ago the value of the Nasdaq 100 companies (mainly technology) were equal in value to all of the energy, materials, and other commodities companies. Today, the ratio is $22 trillion for the Nasdaq companies to $3 trillion for the commodities companies. If we are indeed at the beginning of an AI and technological revolution, then we are going to need a lot more and a lot better energy and materials to fuel it. And companies doing just that should be well positioned for the future.