Why plunging commodity prices are ominous for stock market – ETF Daily News
Sy Harding: Consumers understandably like to see pricesfor commodities decline, the more the merrier, particularly gasoline (NYSEARCA:UGA) and energy costs (NYSEARCA:XLE).
Many analysts also take commodity price declines as a positive for the economy, on the theory that consumers will have more spending money in their pockets, and manufacturers will have lower costs, so hopefully greater earnings.
Investors tend to also take declining commodity prices as a positive for the stock market on the same reasoning.
Unfortunately, history doesn’t confirm the optimism.
As a five-year chart of the CRB Index of Commodity Prices shows, declining commodity prices usually indicate demand for goods is dropping and the economy is in trouble, which in turn is a problem for the stock market.
For instance, the price of oil (NYSEARCA:USO) dropped from $147 a barrel in 2008 to just $35 by early 2009. The CRB Index of Commodity Prices plunged 57%, from 470 to 200 in the same period. Good for the economy and stock market? Not hardly. The severe 2008-2009 ‘great recession’ and severe bear market in stocks accompanied the decline in commodity prices, and saw the S&P 500 (NYSEARCA:SPY) also plunge 57%.