From the "where there's smoke there's likely fire" department: Non-energy commodity prices are up 30% year to date, Caterpillar stock is up over 50% from its January lows, and global equity prices—as well as the S&P 500—are up almost 20% from their February lows. Something's happening out there, and it looks promising. Most likely, global economic activity is picking up, and cheaper (and more stable recently) oil prices could be the reason.
The chart above compares the CRB Metals index (copper scrap, lead scrap, steel scrap, zinc and tin) to the price of Caterpillar stock. Both have traditionally moved together, and the past year or so is no exception. Global mining activity looks to be picking up, and so it's a good bet that global activity in general is on the mend. This supports my forecast over the past six months that we are likely to see some stronger GDP numbers for the second half of this year. It's nothing to write home about yet, but any improvement from the 1.1% annualized growth rate of the first half (which includes today's modest upward revision to second quarter growth) is certainly welcome.
The chart above shows a longer-term view of metals prices. They do tend to soften during periods of economic weakness, and they do tend to rebound as activity recovers.
The chart above compares the level of US stock prices to the ratio of the 10-yr Treasury yield to the Vix index (which ends up being a proxy for the market's nervousness and confidence in the outlook for growth—a higher number reflecting more nerves and less confidence, and a lower number reflecting less nerves and more confidence). In the past year the market has overcome fears related to collapsing oil prices and the British decision to exit the European Union. It now feels like we're in a holding period, in which activity has recovered somewhat from a fear-induced slump, but nothing is going gangbusters yet.
If there is to be any meaningful surge in activity on the horizon, it will likely require a satisfying and confidence-building resolution to the US elections which are coming up in just over 5 weeks. I think that, in turn, would require a Trump victory, since he would almost certainly work with Congress to reduce tax and regulatory burdens. If nothing else, a significant reduction in the corporate income tax rate could unleash a tidal wave of profits repatriation and a subsequent surge in corporate investment.
At the very least, there is reason to remain optimistic.
Copyright © Scott Grannis
