Commodities Are Helping Stocks Regain Their Footing

Commodities5/24/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened higher this morning after two Wall Street firms issued bullish commodities outlooks.  After getting battered yesterday on Euro zone debt concerns, market participants appear to be turning the risk dial back to the “on” position and shifting their focus elsewhere.  Overseas equity markets are mostly higher, with Europe benefiting from strength in miners as base metal prices rebound on the bullish broker outlook.  Asian markets inched higher on speculation that the China slowdown may be priced in.  Commodity gains, which are being bolstered by a weak dollar, are being led by crude, copper, silver, cotton and coffee.  U.S. crude is making another run at $100 this morning, while gold is up five dollars to $1520 and silver is about a dollar higher near $36.

Looking back at Monday, stocks and commodities fell sharply as Euro zone debt fears continued to weigh on risky assets, while renewed fears of a pronounced China slowdown pressured commodity prices.  After yesterday’s losses, the S&P 500 is down over 3% from late April highs to a fresh one-month low.  The latest market jitters were triggered by a negative Italian credit outlook, more Greek debt downgrades, and slowing PMI readings from Europe and China.  All 10 S&P sectors fell, with defensive Consumer Staples and Telecom holding up relatively well but still almost 1% lower.  Cyclical sectors lost between 0.9% and 1.5%, with Consumer Discretionary on the better side thanks to Retail’s resilience as oil fell and Tech on the bad side on selling pressure in software.  Commodities as a group sold off about 1% on the global growth concerns and strong dollar, with China-driven copper hit especially hard.

The Markets Broken Down:

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

  1. European debt and global growth concerns continue to support Treasuries. Several negative news items in recent days have escalated European debt fears.  First, the rating outlooks for Italy and Belgium were changed from “stable” to “negative” by S&P and Fitch, respectively.  Second, Moody’s stated that any debt restructuring in Greece, an outcome the markets were beginning to accept, may result in downgrades of other sovereign debt issuers as well as several banks.  Finally, Spain’s ruling party suffered notable losses in regional elections this past weekend, clouding the potential path to reform.  European debt fears have, along with weaker-than-expected economic data domestically, fueled growth concerns and helped keep Treasury yields at the low end of the trading range.
  2. Corporate bonds continue to “hold in” relatively well. The average investment-grade corporate bond yield advantage over comparable Treasuries has widened by 0.04% over the past few weeks to 1.42%.  High-yield bonds exhibited modest weakness last week, with average yield spreads widening to 5.2%.  Considering the increase in global risks, the resilience has been impressive.  The corporate and Treasury sectors of the bond market appear to be sending conflicting messages about the economy.
  3. Municipal bonds seem to have paused for the moment. Lower yields and expectations for a modest increase in new issuance in coming weeks put the impressive municipal bond rally on hold.  Municipal bond prices were unchanged last week while Treasury prices posted modest gains.  After outperforming Treasuries over the prior five weeks, it appears that the municipal market was due for a breather.
  4. Retail sales, a major driver of the U.S. economy, are up 3.1% from a year ago. The 3.1% year-over-year reading is only slightly below the pace of sales seen during the 2002-2007 economic expansion, continuing to suggest that American consumers are “hanging in there.”  In the latest week, however, retail sales dropped despite an 11% fall in gasoline prices, the largest since the first week of December 2008.  The real culprit this past week was the weather.  Despite the foul weather, sales are still on track to post a 3 to 3.5% year-over-year gain in the full month of May.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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