So far, for an economy flirting with recession, earnings results have been surprisingly good. The technology, energy and industrial sectors have generally been sources of strength, while write downs have continued to hurt the beleaguered financial sector.
What is even more surprising is that the stock market has enjoyed a nice rally off its lows in spite of oil prices hitting new highs and many other commodities following suit. If you had told me that oil would hit $118 a barrell a few months ago, I doubt I’d be thinking “stock market rally”. It’s hard to know what to make of this, other than to know that the market always seems to do the exact opposite of what most are thinking and quite possibly, the downside had just been too ugly.
Commodity prices do, however, seem to be in bubble territory, having made a parabolic ascent to new highs. As we know from the bubble in housing and technology stocks, asset bubbles can have a mind of their own for a period of time and it is always very difficult to know when they’ll come crashing down. Our approach has been incremental in nature, rather than wholesale in fashion, but we’ll still admit that we’ve left a few dollars on the table.
China’s stock market is now 50% off its highs, but few seem to be noticing. Perhaps the credit crisis has consumed the media’s attention. According to the Wall Street Journal, this large loss amounts to roughly 70% of of the country’s GDP. While still white hot, China’s GDP growth did begin to decelerate in the first quarter, and the country’s monetary policy makers continue to increase rates. Most leading indicators for the country are now down, rather than up.
Given the strong five year link between commodity prices and emerging market stocks, is it reasonable to expect that commodities will eventually catch China’s stock market cold? While we’re inclined to say yes, we also know that all bubbles can have a mind of their own, at least for a time.
