COMMODITIES AND US STOCKS: CONVERGENCE AND DIVERGENCE © Leo Haviland January 28, 2013

Since mid-2008, commodities “in general” and United States stocks “as a whole” have moved roughly in the same direction at around the same time. In this convergence process (relationship), noteworthy bull (bear) moves in US equities find parallels in those in the commodity arena. Thus significant marketplace rallies (declines) have tended to occur around the same time.

However, this perspective is not the only vantage point by which to assess the often close relationship between US equities and the commodities complex. There also is another, longer run view by which one can examine the relationship between them. Since spring 2011, commodities have ventured down (or sideways to down). However, key American stock benchmarks such as the S+P 500 have attained new highs, first in April 2012, then September 2012, and again in January 2013. Thus despite the convergence at assorted timely turning points since spring/ summer 2008, and even though the two territories continue to trade together to some extent, arguably there has been noteworthy divergence in their overall relationships (their trends) since May 2011.

Now recall several of 2007-08’s details. US equities peaked in October 2007, almost nine months before the commodity one in early summer 2008. Only after the final stock marketplace

summit in May 2008 did equities and commodities trade in close tandem. The current longer run relationship thus perhaps likewise reveals divergence, but with the commodity peak to date appearing well before any major S+P 500 one.

In contrast to 2007-08, what if the major peak in commodities is well before that in stocks (and the lag is likewise so great as to suggest divergence)? Suppose- and this admittedly is a key suppose- eventually commodities and US stocks will trade together over the long run. After all, so-called marketplace relationships can change dramatically, whether from the convergence/ divergence (lead/lag) perspective or otherwise. What does continued divergence, the failure of commodities to near or exceed its spring 2011 heights, suggest?

The 2007-08 relationship warns that the current continued failure of commodities to confirm the equity rally eventually will reveal a notable decline in stocks. Since the duration between the spring 2011 commodities top and today’s new highs in the S+P 500 is almost 20 months, whereas that between October 2007’s stock pinnacle and the broad GSCI’s summit in July 2008 was about nine months, the failure of the broad GSCI to achieve new heights should warn equity bulls that a decline may be fairly near in time.

S+P-500-Chart-(1-28-13,-for-essay-on-Commodities-and-US-Stocks)

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Commodities and US Stocks- Convergence and Divergence (1-28-13)
S+P 500 Chart (1-28-13, for essay on Commodities and US Stocks)