What the Surge in Industrial Metals Means for Markets
When consumers are optimistic about the economy, they buy stuff. That stuff needs to be manufactured by somebody, and those somebodies need materials to make it.
So, manufacturers get busy, inputs are in demand, and industrial materials tend to rise. There's no doubt that's the case now.
Dean has shown how some metals like zinc and copper have skyrocketed. That has helped to drive the S&P GSCI Industrial Metals Index to a new high. Just as impressively, the index has doubled from its pandemic-panic low.
METAL PRICES DECLINED EVERY TIME
After prices in this market doubled from a low, the metals have typically been about to cool off. High prices tend to generate higher production, leading to lower prices through the magic of market forces. Massive moves like this don't often happen, so the usual caveats about small sample sizes apply.
By the time these metals doubled, the upside was relatively limited and, over the next couple of months, cooled off every time. The 2006 spike preceded an incredibly volatile stretch (well, they all did), and metals prices were nearly 20% higher six months later, while the other three all saw double-digit declines.
A GOOD SIGN FOR STOCKS
The doubling of industrial metals tended to be a good long-term sign for stocks. There is not a one-for-one relationship between the economy and the stock market. Still, we could assume that a rise in industrial metals meant good things about economic demand, and over the next year, the S&P 500 sported double-digit gains each time. There was also a 1-2 month soft spot each time, too, however.
It was also a good sign for other stock indexes. Again, the indexes stumbled over the next 1-2 months, but the Nasdaq Composite, Dow Industrials, and (especially) Russell 2000 showed good long-term gains.
REITs were among the best performers across time frames among sectors and factors, while Materials struggled a bit. Small-caps and Value stocks tended to hold up well.
NOT A BOND KILLER
The U.S. dollar tended to rise over the medium-term, while gold and commodities fell, but a year later, the Bloomberg Commodity Index showed a gain each time.
While a doubling of metals prices might inflate inflationary fears, it wasn't a consistent stopper for the bond bull market. Yields on 10-year Treasuries dropped an average of 15 basis points over the next six months, but it did ignite a quick rise in the early 1980s.
Structural forces, instead of pure supply and demand, may be helping to inflame the surge in industrial metals prices. Still, ultimately consumer demand for goods is among the most critical drivers. And when we see that, producers have an incentive to increase production, so prices in the metals have consistently declined. It's been a good long-term sign for stocks, though, and adds to the idea that the recent dip in momentum may serve to bring in yet more buyers.