Why Plunging Commodity Prices Are Great for the Stock Market
The big drop in the value of many commodities is very good news for this stock market.
All of a sudden, raw materials are cheaper in price. This is going to translate right to the bottom line of many corporations.
And one of the best developments is the weaker price of oil. Big oil stocks have done consistently well in the stock market, but smaller corporations have struggled due to the fact that the spot price has not been able to move much past the $95.00-per-barrel level. Now that spot oil is below $90.00 a barrel, transportation stocks are really going to benefit.
Of course, it takes time for big oil corporations to reduce gasoline prices. It’s common knowledge that when the spot price of oil spikes, gasoline prices immediately go higher. But when oil drops, it always takes much longer for gasoline prices to reflect reality. This is the nature of big oil, and there’s nothing that can be done about that.
The stock market is currently digesting a slew of earnings from corporations, as well as economic news that continues to show economic struggle.
But with gold, silver, and oil all trending lower, this is an absolute gift to the majority of old economy corporations.
It never used to be this way until recently, but the U.S. stock market now trades off of China’s economic data. And while China is still growing significantly, it’s all about expectations for high growth, not the degree to which the economy may be contracting.
The plunging spot price of gold is partially a reflection of the sentiment that investors have regarding risk. The demonstrated lack of inflation in posted numbers (not even close to reality) is being used by traders to justify selling in gold.
For the fourth quarter of 2012, gross domestic product (GDP) numbers were terrible for the U.S. economy. And while the stock market has been hitting new record highs, it is absolutely unreasonable to assume that first-quarter GDP numbers are going to be rosy.
Corporations have actually been doing very well, considering the lack of real economic growth in the global economy. Additionally, corporations have been extremely conservative with their economic forecasting, trying to make sure that they don’t report earnings below expectations.
My view is that the pronounced drop in the value of many commodities will be helpful to corporations and their earnings reports going forward.
The stock market is currently digesting weaker economic news, but I still feel that the overall trend for higher share prices remains intact.
This is a stock market that is desperately in need of a major correction. Given the current information, it’s probable that this will be an opportune entry point for new positions.