Listen to this post
But just look at how much worse inflation is at the wholesale level in terms of higher input costs for businesses. This data is captured in the monthly Producer Price Index (PPI) report, as opposed to the more widely followed Consumer Price Index (CPI). Just last month, the PPI soared 9.7% year over year, the highest on record.
Businesses are paying a lot more for raw materials than they were just a year ago, and producer prices may continue to move higher from here because raw commodity prices are going through the roof.
Many types of raw commodity prices — everything from aluminum (up 50% YoY) to zinc (up 31% YoY) are at or near multiyear highs. And there is no sign of commodity prices backing off anytime soon.
In fact, commodities just staged a bullish momentum reversal to the upside, as you can see below.
As recently as December, the Bloomberg Commodity Spot Index (BCOMSP) had fewer than 40% of component commodity prices trading above their 50-day moving average.
But since then, commodity prices have staged a bullish reversal, surging higher in unison. And today more than 80% of commodities are trading above their 50-day moving average.
In the past, this kind of bullish momentum reversal has been a very good sign for commodities going forward, according to analysts at SentimenTrader.com. This type of momentum reversal has been triggered 57 other times in the past 51 years, and returns for commodities going forward were consistently positive.
On average, during the 13 months following such a momentum reversal, the Bloomberg Commodity Spot Index was up 75% of the time, according to SentimenTrader, and posted median gains of 11.1%.
In fact, the commodity index has gained 50% in value over the last two years alone. And historically, big moves like this in a short time period have come at the very beginning, or in the midst, of major, long-term commodity bull markets.
This includes the huge secular bull market gains during the 1970s and again in the 2000s. And in those cases we’re talking huge, multiyear gains in commodities.
From 1970 to 1980, the Reuters/Jefferies CRB Index, a broad basket of commodities prices, soared 235% in value, as seen in the above chart. And from 1999 to 2008 a similar index was up more than 500%!
Commodity-producing stocks have been a huge beneficiary of the uptrends for inflation and commodity prices. Energy stocks are already up 12.7% in 2022, even while the S&P 500 Index is down 4.8%.
Agricultural stocks as measured by the First Trust Indxx Global Agriculture ETF (FTAG) are up more than 3% so far this year. And metals stocks as measured by the SPDR S&P Metals & Mining ETF (XME) have jumped 1.4% in January.
Commodities prices are rising across the board at the fastest pace in many years. Commodity-producing stocks are following suit. And with stock and bond markets turning more volatile, you may want to consider diversifying your portfolio by adding commodity-related investments.