Positive Take on an Unnoticed Bear Market

By Megan Horneman. © Verdence Capital Advisors

Key Takeaways:

  • Commodities in contraction territory.
  • Grains prices deeply in bear market and may ease food pricing pressures.
  • Energy prices see temporary reprieve.
  • Highly cyclical (e.g., metals, lumber) commodities dropping.
  • Too early to say commodities have peaked; headwinds remain.

While investors have been focused on the equity bear market, there is another bear market occurring that may not be gaining attention. The Bloomberg Commodity Index is in contraction territory (-10%+ from recent peak) and has not officially entered a bear market (down 20%+) but there are many commodities in a bear market. The inflation breakeven rate on five-year Treasury Inflation Protected Securities has fallen sharply (down 90 bps to 2.84%). In this weekly we will highlight the commodities that are falling and what it means for the economy.

A bear market in select grains may help food prices: The Bloomberg Grains Index is in contraction territory (-16% from its May 2022 high). However, wheat (-36%) is deeply in a bear market as optimism about the outlook for wheat crop in the U.S. improved, fund selling has kicked in and global recession fears are rising.

Energy prices drop, at least temporarily: The Bloomberg Energy Index is almost in a bear market but select energy commodities are in a bear market. Natural gas, whose price is affected by mild temperatures and lower demand, is down 34% since the June peak. While still painfully high, gasoline prices have modestly retreated (-$0.12).

Metals in a bear market on slower global growth: The Bloomberg Industrial Metals Index is firmly in a bear market (-34%). Metals are highly cyclical and are declining on recession fears.

Other noteworthy declines in commodities: Lumber prices are down ~60%, good news for homebuilders. In addition, freight costs, as measured by the Freightos Global Index (the cost to ship a 40- foot container of freight) are down 36% from the September 2021 peak.

While many commodities have fallen sharply, we acknowledge that the absolute cost is still extraordinarily high and will likely weigh on consumer confidence and spending power.  In addition, commodity prices are volatile and highly reliant on supply dynamics which for some commodities remain a concern. What is positive about the recent drop is that it shows speculation can quickly evaporate from the commodity markets and drive prices sharply lower. economic growth continues to weaken that should also help to limit the upside across those highly cyclical commodities.


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