Stocks, Long Term Bonds, and Commodities

This week was a little wild with fluctuations in commodity prices. This briefly talks about the correlation between these 3 types of assets. The beginning section is a weekly recap from Vanguard. The final section gives some trivia about the human body.

I do want to mention the Relay for Life event on June 3rd and 4th to raise money for the American Cancer Society. This week, 3 more people became sponsors which is a wonderful thing and I do a 25% match to their donations. Please join the list, we all know way too many people impacted by cancer. If you want to make a donation let me know and if it is based upon distance, I plan on walking at least 40 miles.

Vanguard

Steep gasoline prices impacted key indicators this week as major sectors of the economy felt the squeeze of high fuel costs. Prices paid by producers and consumers rose at their fastest 12-month clip in more than two years while retailers also endured the impact of high energy costs. Economists are thus keeping a sharp eye on inflation, though upward pressure shows some signs of easing. For the week ended May 13, the S&P 500 Index fell 0.2% to 1,338 (for a year-to-date total return—including price change plus dividends—of about 7.1%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 3.18% (for a year-to-date drop of 12 basis points).

Stocks, Long Term Bonds, and Commodities

These 3 asset classes represent most things that impact our day to day lives. Long term bond rates impact lending rates, like mortgages. Commodities impact us at the pump, grocery store, etc. Stocks impact the average investor that invests in a stock or a mutual fund. So the question is does their performance relate and can it be correlated? The answer is that they are loosely related and a correlation factor can be calculated which changes with time.

Generally speaking, in a growing economy stock prices rise, long term bond rates rise (price drops), and commodity prices rise. The reason is that corporations will grow giving better profits and allowing for hiring of more people. Commodity prices rise due to higher demand from companies and people who have more money. Long term bond rates rise as investors sell long term treasury bonds to purchase stocks and commodities.

Generally speaking, in a slowing economy the opposite happens. Commodities are traded on exchanges around the world and people invest in them by buying them directly, purchasing stock in a company, or purchasing a mutual fund/ETF. Since commodities are traded worldwide the value of a currency will impact the prices. This means if the value of the US Dollar declines 10% that the cost of commodities that we import will increase by 10%, another reason to solve our Federal debt problem.

This relationship breaks down when commodity prices get so high that it impacts the ability for a company to make a profit or us consumers to purchase day to day items. Normally, when things act wild it means that an investment class is at a resistance level. This suggests that the rise in commodity prices has peaked for now and any talk of commodity prices continuing to rise this year, such as gas prices over $5/gallon, does not make much sense to me. Longer term, higher commodity prices make sense with an improving global economy and our growing Federal debt.

If you are concerned about having to pay higher prices at the pump or in the store own a mutual fund that invests in commodities. If commodity prices rise you make money to cover the added expense. If commodity prices fall you have more money in your pocket. Some food for thought on how to look at this issue from both sides.

The Amazing Human Body

• There are 230 joints in the human body.
• The average length of arteries, capillaries and veins in the human body is 62,000 miles.
• It has been medically proven that laughter helps control pain, lower blood pressure and relieve stress.
• Most able people will walk 115,000 miles in their life-time – or around the world 4 ½ times.