— by Mitchell Clark, B. Comm.
There’s a lot for the stock market to deal with now and I don’t think the bulls can get the upper hand over all the issues the market faces. It’s not just the economic data, like housing prices or geopolitical events in North Korea. There are a whole lot of reasons why this market should experience a material pullback in prices. If it doesn’t, then investor sentiment is much stronger than I anticipated.
When I look at all the capital markets and try to figure what the future holds, the stock market seems to be the most uncertain. You can make a learned and thoughtful case for just about any eventuality in stock prices going forward. There are just as many reasons why stock prices should go down over the coming months as there are for the rally to continue. Clearly, it’s a traders’ market out there and this isn’t going to change anytime soon.
Getting back to the capital markets, when I look at the big picture, I keep coming back to commodities as the standout opportunity over the near and medium terms. In my view, the commodity price cycle is getting close to reaccelerating again, after a substantial price retreat in the forced liquidation of virtually all financial assets. We’re seeing oil slowly tick higher in price and the same is true for silver, gold, soybeans and sugar. We already had a big run in oil and precious metals, and it’s my feeling that the last leg will substantially include agricultural commodities over the coming years.
Further to this, China and India’s appetite for global commodities is only going to accelerate from current levels of demand. Those two emerging, large economies may not have the same growth rates as previously demonstrated, but it doesn’t matter. Production won’t be able to keep up with their demand and prices can only go up from here. Barring any major shocks to the global economy, like war or a financial system collapse, this is how I see things playing out in the not-too-distant future and this is why investors have to have some exposure to this sector going forward.
Part of my bullish sentiment for the commodity price cycle scenario has to do with the Federal Reserve and the expectation for inflation down the road. I feel that it’s likely we’re going to experience a measured, but sustained period of inflation, because of all the loose cash that’s currently floating around the system. And, accordingly, we’re going to have price inflation in just about all real assets (like houses and land), as well as in the raw materials required for daily living. What this will lead to is much higher interest rates and what this will do is make it much more difficult for a gold miner or sugar producer to get financing to increase production. So, the commodity price cycle is likely to feed on itself for a while in the next decade to come.
The only way to beat this scenario is to own the right stocks in the right sectors, pay down debt as fast as possible (because interest rates can only go up from current levels), and live modestly. What we’ve learned over the last year is that the business cycle very much exists and that it’s important not to be overextended. We’re going to keep on learning these lessons as price inflation and interest rates reverse from current levels.