June 24, 2024
The commodity supercycle is still young, these strategists say. Here’s why.

The commodity supercycle is still young, these strategists say. Here’s why.

Be careful what you wish for. U.S. job openings dropped below 10 million, a symbolic sign that the Federal Reserve’s efforts to combat inflation by sapping labor-market demand was working — and U.S. stocks promptly fell. Perhaps the bigger issue is that investors were not willing to push stocks out of the 3,800 to 4,200 range the S&P 500 SPX, -0.25% has been trading in for months.

It might not be the most obvious time to be discussing a commodity supercycle, with recession talk growing, but then that’s what makes this call more interesting. Strategists at Wells Fargo investment Institute argue it’s year three of a commodity supercycle, which they say has plenty more room to run.

John LaForge, head of real asset strategy, and Mason Mendez, investment strategy analyst, say commodities are like black holes, in that escaping the gravity of a supercycle is difficult for any individual commodity. They point to this chart, looking at commodity momentum since 1800, plotted in 10-year moving averages, which shows that food, energy and the commodity complex as a whole tend to follow each other around.

Right now nearly all the signs, both technical and fundamental, point to a commodity bull market, they say. The early signs are mostly shifting prices and technical indicators, and the latter signs are more fundamental in nature, like restrained supplies. “The bottom line is that the key early technical indicators are confirming to us that a new supercycle likely began in 2020.”

The analysts went further into depth on what they call washed-out sentiment. They say the process goes something like this: near the end of a commodity bull supercycle, prices go so high that oversupplies become rampant and need to be worked off, which results in investment stopping to flow into production. They say that in both corn C00, -0.31% and gold GC00, -0.08% — not commodities with much in common — supply growth rates have turned negative in recent years. Both showed similar conditions at the start of the last supercycle, in 1999.

They advise using commodities as portfolio diversifiers, which certainly would have helped last year, when both stocks and bonds fell but the Bloomberg commodity index rose nearly 16%. They highlight commodity prices typically move differently than stocks or bonds over the long run. And they say that supercycles have historically lasted a decade or longer, and the shortest commodity bull market on record was nine years.

One caveat: the speed of technology advances. Sometimes technology can help fuel demand, but conversely, to the extent technology can make commodities easier to extract, it can also buoy supplies. The obvious example here, not pointed out in the note, is the shale-oil revolution. There’s an interesting article in The Economist (subscription required), how copper has yet to be the beneficiary of a technology boost.

The market

U.S. stock futures ES00, -0.33% NQ00, -1.12% edged lower. Oil prices CL.1, -0.48% fell but held over $80 per barrel. The yield on the 10-year Treasury TMUBMUSD10Y, 3.312% turned lower after the latest jobs data.

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The buzz

ADP reported a slowdown in private-payrolls growth to 145,000 jobs in March, as well as a slowing pace of pay growth. Shortly after the open comes the the Institute for Supply Management’s services index. Cleveland Fed President Loretta Mester said interest rates would need to be increased “somewhat” from here.

Overseas, New Zealand’s central bank made a larger-than-expected 50 basis point rate hike, while a joint forecast of Germany’s leading institutes upgraded its view on the eurozone’s largest economy, now expecting a 0.3% advance.

Walmart WMT, +1.66% forecast earnings in a range of $5.90 to $6.05 per share for its fiscal year, below the FactSet-compiled analyst estimate of $6.11.

Johnson & Johnson JNJ, +4.49% proposed to pay up to $8.9 billion over 25 years to settle claims connected with cosmetic-talc litigation.

Alphabet’s GOOGL, -0.24% Google says its chips are faster and more power efficient than comparable chips from Nvidia NVDA, -2.08%.

Western Alliance Bancorp WAL, -12.38% shares fell in premarket trade after the regional lender detailed the latest losses in its portfolio of loans and securities.

Brandon Johnson was elected mayor of Chicago, the country’s third-largest city. Former President Donald Trump was defiant in a speech to supporters after his indictment.

Best of the web

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OpenAI, the tech company backed by Microsoft MSFT, -0.99%, is facing what is believed to be its first defamation lawsuit over a claim by its ChatGPT chatbot that an Australian mayor served time in prison for bribery.

Top tickers

These were the most active stock-market tickers as of 6 a.m. Eastern.

Ticker Security name
TSLA, -3.67% Tesla
AMC, +3.58% AMC Entertainment
BBBY, -4.75% Bed Bath & Beyond
GME, -1.25% GameStop
BUD, -0.05% Anheuser-Busch InBev
APE, +1.79% AMC Entertainment preferreds
MULN, -3.90% Mullen Automotive
NIO, -2.71% Nio
AAPL, -1.13% Apple
AI, -15.47% C3.ai
The chart

Sure, higher gasoline prices naturally drive demand for electric vehicles. But at what point do high electricity prices make it more cost-effective to buy old gas guzzlers? This chart from Barclays breaks it down — roughly, 10 cents per kilowatt hour equates to $1 per gallon. Right now it’s cheaper to fill a car at the pump than recharge at peak hours.

Random reads

Easter means the annual production of a 15,000-egg omelette.

This man was successful in his marriage proposal, at the cost of a one-year ban from Dodger Stadium.

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