Credit: Shutterstock photoWhen it comes to commodities and the stock market, investors are quick to blame oil for causing market volatility. While this is the case more often than not, other commodities such as corn and gold have a tremendous impact on daily stock prices. Global commodities are typically broken down into a variety of basic headers; energy, metals, agriculture, meat & livestock, and softs. Energy, as we know, are the most heavily scrutinized assets and include oil and natural gas. Metals, on the other hand, track our most precious assets, gold and silver. Agriculture, meats, and softs observe corn, coffee and live cattle, just to name a few. Since commodities are key inputs in many goods, they have a profound impact on the earnings of public companies which produce them.
For example, chicken prices have an immense impact on a company like Buffalo Wild Wings (BWLD), which predominantly sells chicken wings. When poultry prices rise, this puts pressure on the company’s margins and quarterly earnings. Weak earnings are usually enough for investors to start selling and cause falling stock prices. On a larger scale, when all commodities are fluctuating, they don’t just influence one company, but effect hundreds of the biggest and most widely traded companies. Some of the most important commodities traded today include, oil, gold, lumber, and corn.
Oil Prices
It comes as no surprise that oil leads the list of commodities that move the market. In the past 6 months, investors have pointed to plunging oil prices as one of the primary contributors to the declining stock market. In 2015, the Dow and S&P 500 suffered their first year of negative returns since 2008 as WTI crude oil hovered around its lower bound limits. This trend continued into the early months of 2016 when the markets were down as much as 10% in mid February with oil reaching 52 week lows of $28 per barrel. However, in recent weeks’ oil prices have rebounded on the news of ceasing over production which has caused the market to close its 4th straight week of gains.
Oil effects America through variety of channels from corporate earnings to consumer spending. Obviously, when oil prices are volatile, earnings from Exxon Mobil (XOM) will fluctuate. Investors are quick to take note of this, leading to a decline in shares of energy companies.
Meanwhile, you may not be aware that oil is a key input in a variety of products we use daily. Retail manufactures use oil to make plastics or fertilizers found at the local Walmart (WMT). By extension, when the price of oil rises, major retailers will pass this on to its customers in the form of higher prices. If they aren’t able to pass on the price hike, then retailers face an adverse impact on margins, subsequently hurting stock prices.
Moreover, oil prices have a direct effect on what you end up paying at the pump. When oil prices are high, consumers must dig deeper to pay for necessities and fuel. Auto manufactures often feel this effect through falling sales on its higher margin SUVs and trucks.
Gold
Unlike oil, gold indirectly follows movements in the market. Throughout history gold has been viewed as a counter cyclical asset, which means the precious metals gains value during market downturns. Since gold is found all over the world and holds high intrinsic value, it is often viewed as a universal currency. When the outlook of the equity market looks bleak or corporate earnings are destined for doom, investors will flock to the precious metal.
On the other hand, when the economy appears to be on the rise, investors will abandon their position in gold in favor of equities. Whether this still holds true, as I have discussed in a previous article, is a point of contention. However, gold still has an impact on jewelers and retailers who sell jewelry related products. Besides jewelry, gold is also used in dentistry, electronics and aerospace, all of which influence publicly traded companies.
Lumber
Now you might be wondering how lumber moves the market or even the economy. While crude oil and copper are often cited as leading economic indicators, lumber is in fact the most correlated indicator with ISM, housing starts and production of all industrial commodities. Lumber takes the form of either softwood or hardwood which is used in construction, furniture, flooring and paper.
Homebuilders pay close attention to the price of lumber as it is tied to the number of housing starts in a given month. As a result, public companies, like Lennar (LEN) and Home Depot (HD), heavily rely on the state of lumber and housing starts to boost earnings. Even more interesting, in the years leading up to the 2008 Financial Crisis, lumber prices and futures heavily diverged. As lumber prices fell, futures rose, until the crisis hit and the two finally converged. While it can’t be said with certainty, lumber prices follow a peculiar trend in the face of economic downturns.
Corn
Corn is among the most versatile and complex commodities, making it one of the single most important crops in the world. Whether you know it or not, corn is a staple in the diet of people around the world. The crop is found in meat we eat daily, corn syrup used in the production of processed foods and beverage and can be eaten off the husk on a nice summer day. Like the other commodities mentioned, corn futures can be bought or sold to protect investors from future price volatility.
It is also worth noting that the price of corn is impacted by the supply and demand of ethanol. Experts are increasingly experimenting with corn, so someday it might be a source of fuel in our vehicles. For now though, food manufacturers, retailers, consumers and by extension, stock prices feel the effect of corn prices.
Final Take
Although there are a number of factors that can move the market, commodities have a profound impact on the stock market. While oil is certainly the most important, other commodities like gold, lumber, corn, live stock and many more not mentioned in the scope of this article carry a significant weight in the world economy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
