Stock Prices Defy Commodity Prices


By Jonathan Barratt

At the moment we can see there is a lot of pulling and pushing on behalf of the market to try and work out which economy will grow the fastest and which economy will fall by the way side. We are comfortable with our assessment so far, that European economic activity will remain subdued, US economic activity will be mixed, and generally positive and China/ India will continue to bounce. However when you discuss the outlook with those closest to the market, traders remain nervous and hesitant to fully commit at these levels.

Why? It looks simple: perhaps it is that the Dow is approaching levels not seen since 2007 and it is hard to buy at the top end of the range and a level of tough resistance; the VIX is trading at historic or seven year lows and looking weak which confirms a level of complacency; and companies in the S&P have an average PE 14.8. If you dig a little deeper on the US PEs you will see that non-dividend paying stocks have an average PE of 35.8 and high dividend paying stocks have an average PE of 17. So it could be argued that if you where long, in some instances it would be wise to take some profits. Further, if we take a good look at other markets, such as the commodity complex, we can find clues that the current rally might not have the legs to be sustained.

Trading in the commodities markets remain volatile and it has been amazing to see the movements. At the beginning of the year you could do no wrong buying the commodities sector as everyone thought the economic recovery was on track. Now some questions are starting to work their way into the trend and we are seeing clear divergence between price actions in the equity markets verses price action in the commodities markets. The commodities market perhaps represents the true picture in working out the state of the global economy, as it is through the purchases of primary inputs that we get a real sense of what is actually happening in the market.

Join the Discussion