Each month we try to highlight the largest or most significant trend that is driving the markets. This can be a challenge as there is a lot of noise out there and plenty of signals for us to sort through. Last month we discussed the ongoing rotation into commodities and materials companies at the expense of technology companies. We are continuing to see this trend although it does appear pretty subtle at the moment. The overall markets along with the tech-heavy Nasdaq were down about 3% for the month whereas energy and broader commodity-based companies were up about 2%. This is something that we will continue to keep an eye on because often commodity prices will go in super-cycles that last many years.
The bond and currency markets seem to agree that “things” along with commodities are getting pricier and will remain pricier. When commodity prices increase, inflation increases. It is up for debate which causes which, but regardless we are starting to see currencies losing value to all sorts of things, while at the same time bond markets are pricing in higher inflation and interest rates. Ten-year and 30-year Treasury yields are approaching 6-month highs and Inflation Protected Treasuries (TIPs) are at 52-week highs relative to nominal yielding treasuries. The commodity index looks similar, approaching 52-week highs, and companies in the business of mining copper are hitting all-time highs.
The Japanese Yen is dropping to levels not seen in over 30 years as it loses value relative to everything else. But this is not just a Japanese thing, we are seeing weakness in currencies all over the place. Assets, especially hard assets, have been making new all-time highs when priced in these currencies. Gold has been making new all-time highs even when priced in dollars. Copper, as mentioned above, is doing the same and crude oil is coming right behind it. In an environment where currencies are declining, of course we are going to see prices go up. And historically speaking, it’s more accurate to think of these price trends not as “How high will they go?” but more as “How long will it last?”
We are still in a bull market and believe there is plenty of room to run for all sectors, but at the same time we are interested in increasing our exposure to sectors that tend to do well in higher inflation, higher interest rate, and higher commodity price environments. For example, if crude oil does get to and remains above $100 or even goes to $200 in the next several years, it wouldn’t be the worst thing to own a few companies or funds in that space.