It is amazing how much has changed in two short weeks. As I write this the Dollar Index stands at approximately 75.33. The dollar is gaining traction and seems to be finding a bid. (To those who do not necessarily speak investing language; this just means it is moving up and looks like it might be continuing in that direction.) This of course has implications throughout all asset classes and I will address some of these today.
First and foremost, the Dollar Index rising seems to be putting a serious halt to the recent run in commodities. The ten million dollar question is, does the correction soon stop and the uptrend start again? While I am a big believer in the long term commodity bull market, I believe this correction may be worse than some are expecting. Without making a blanket statement because everyone has different financial goals, portfolios, and risk tolerances; but if you have some serious exposure in this sector you may want to speak with your financial representative and review things. If the Dollar continues to rise than we just might see the Stock Market also come under pressure. (As I write this Wednesday May 5th, stocks are under some pressure.)
The next four sentences are for the conspiracy theorists, so if you are not inclined toward this line of thinking feel free to skip down and continue reading. I do not believe the Federal Reserve can continue adding liquidity to the market with commodity prices where they are, (and that is the inflation I have been beating the drum about even though the Government's data says inflation has been very tame.) The political environment is also not very conducive to continue raising liquidity and our debt levels via treasury purchases. However, if commodity prices can decrease substantially along with the Stock Market, then it will be much easier to justify continuing liquidity measures. I have some serious misgivings, if this is the ultimate objective, and seriously hope my line of thinking is way off! It also seems speculators and big oil companies are being demonized again as the cause of higher gas prices. Folks, I can assure you that in the long term basic fundamental supply and demand will determine commodity prices and nothing else. Speculators may cause a short term overbought or oversold market, and simultaneously affect prices that way, but this is definitely not sustainable. While I am on my soapbox, any extra regulation or tax directed at a single industry will just get passed onto consumers and ultimately produce a different outcome than originally intended.
Nobody has all the answers regarding what will happen to prices in the future. After a very good run in many asset prices I do not think the Stock Market will tank quickly. Many buyers will continue their previously successful strategies of "buying the dip" so prices could get choppy before a new trend is established. I also do not expect a type of "flash crash" like we had about a year ago. Remember, no bull or bear market is exactly alike and previous asset class winners or losers do not usually repeat themselves in the next secular market. If recent history is any guide, our Government will probably come to the rescue if the stock market falls too much and implement their Keynesian economic strategy.
Written By: Daniel Petrey, CFO, MBA