Confidence Improves—Oil, Gold, and the Stock Market Going Up

Confidence ImprovesYou know what is really standing out in the current stock market rally? Oil and gold prices. Oil prices have always represented a barometer on the U.S. economy, and gold is breaking out of its price correction that began last year. If the price of oil and gold are going up together, you can bet that the U.S. dollar is going down and investor sentiment is going up.

Oil and gas stocks have been in the doldrums lately, largely because of weaker spot prices, but also because institutional investors have been more reticent to bet on resource stocks, especially those that don’t pay any meaningful dividends. The current stock market rally has mostly been all about big-cap companies and higher dividend paying stocks that have been popular all year. But with oil and gold now sparking new interest in commodity markets, it is definitely fuel for more stock market upside, at least psychologically.

With improving investor sentiment (due to multiple factors), traders are bidding more on traditional commodity-related currencies like the Canadian and Australian dollars. The marketplace now views the eurozone as having more teeth in terms of backing its member country’s bonds, so the U.S. dollar is suffering. But there’s nothing wrong with a weaker U.S. dollar relative to the world—especially in slow economic times. Policymakers have created the fundamentals for a declining U.S. dollar, and it’s a trend with staying power.

A weaker dollar is exactly what the Federal Reserve wants, and it’s helpful for central bank policies like the second and third rounds of quantitative easing (QE2 and QE3)—whether that’s a good thing is another question. And it’s boosting commodities like oil, gold, and silver, which are priced in U.S. dollars and tend to trade inversely to the currency.

Here we are in the middle of the summer doldrums, and the stock market is going up and commodity prices are turning around. It really is quite amazing because the economic fundamentals (and risks) haven’t changed. If the stock market were expensively priced, then this rally wouldn’t be taking place. And even if corporate earnings haven’t been growing, they’ve stayed steady, and balance sheets are rock solid. (See “Corporate Profits Meeting Expectations—Stock Market Action Positive.”) The stealth stock market rally should keep right on going until Ben Bernanke, chairman of the Federal Reserve, speaks and a better tone from Europe is certainly helping the situation.

Oil, gold, and silver prices should keep ticking higher over the near term, and this will help the current stock market rally. Gold and silver stocks have been in the doldrums too, and valuations for many producers are now attractive. But spot oil is the barometer. If oil prices are going up, even though this puts pressure on consumers, capital markets are saying that they have more confidence in the future.