Copper is a critical industrial raw material.
Scott Olson/Getty Images
Stocks have been down in recent weeks, but prices of select commodities are up. Financial markets are signaling that the economy is truly strengthening.
The S&P 500 is down a few tenths of a percent since Feb.12, the date that marked the beginning of the current weakness. But growth stocks have taken a bigger hit. The Vanguard S&P 500 Growth Index ETF (ticker: VOOG) is down 3% in the same span and smaller-capitalization growth names have fallen almost 5%.
The moves are caused mostly by substantially rising interest rates, which in themselves are a signal that people are more upbeat about the economy. Faster growth is more likely to lead to inflation, and to central-bank efforts to rein it in by raising interest rates.
The yield on 10-year Treasury debt is up to 1.50% from 1.1% around the time growth stocks began falling. Higher rates erode the value of future cash flows, a key factor in valuing stocks. Growth companies take a bigger hit because a bigger portion of their profits is expected further into the future than at more mature companies.
Meanwhile, commodities—the highly economically-sensitive ones, in particular—have run hot. As growth stocks began their ride downward this month, the price of crude oil has risen almost 8% to $63 a barrel, a level last seen at the end of December 2019, just before the pandemic ravaged global demand for oil.
Copper, a critical industrial raw material, has also run up, with a gain of 14% since the second week of February, partly because the dollar has weakened. Many commodities sold internationally are priced in greenbacks, so their prices rise when the dollar falls relative to the yen and euro, for example.
The U.S Dollar Index (DXY) is down 0.7% since the second week of February. The currency has faced pressure as an improving economy has encouraged people to move money out of safer assets, such as Treasury debt, and into riskier ones like emerging-market stocks.
Stocks in producers of oil and copper are up even more than the commodities themselves. The Energy Select Sector SPDR exchange-traded fund (XLE) is up more than 13% and copper miner Freeport-McMoRan (FCX) has gained 20%.
The divergence between stock-market indexes and commodities is no surprise. The expectations for increased inflation and rising rates that have hurt stocks stem from a view that the economy will be performing better, with more demand for oil and copper.
It isn’t just commodity producers that are gaining. So-called cyclical stocks, such as banks, have performed well. The SPDR S&P Bank ETF (KBE) is up more than 10% since the selling pressure in growth stocks began.
A stronger economy might mean banks may make more loans in coming quarters. Each loan is also more profitable when the gap between rates on short-dated and longer-dated borrowing increases, as is happening now. Banks pay short-term rates for funds they obtain as deposits, or in the money markets, but they lend it out for the long term, with mortgages as long as 30 years.
Growth stocks’ earnings meanwhile, generally are less sensitive to economic conditions, which is one reason the shares rose so fast after the pandemic struck last year.
Driving the positive sentiment is proof that the economy is indeed healing. States are starting to lift restrictions as more people are vaccinated. And excess levels of cash sitting in many household and small business accounts, consumer spending and small-business hiring look positioned to rebound sharply.
Data released Thursday morning showed a 3.4% increase in orders for durable good in January compared with December, more than triple the 1% increase. Jobless claims fell to 730,000 from 861,000 last week.
Economic momentum is building. Don’t mistake a correction in growth stocks for negative sentiment.
Write to Jacob Sonenshine at [email protected]
