Everyone knows what commodities are, right? Crude oil, natural gas, corn, wheat, gold, silver, beef, pork and so forth. And investors know that at the beginning of 2016, commodities, as an asset class, were in a bear market.
In March, however, commodities began to stage a rally of sorts. One question on the minds of many is: “What does this mean for the market in general?”
Connecting The DotsCommodities, are bought and sold every day and make up an asset class all their own. Commodities and the prices they bring, also affect the equity market in a big way.
For example, when corn is high, the cost of producing anything that uses corn goes up. When that happens, consumers buy less, earnings go down taking stock prices with them.
While it’s a little more complicated than that in reality, the gist is that, absent intervention by central banks, higher commodity prices often lead to lower stock prices for companies that consume those commodities.
Conversely, some equity stocks – those related to companies that manufacture or process those commodities go up when commodity prices increase.
The Commodity Picture Today
As noted above, for the first part of 2016, commodities in general were in a bear market and prices were lower. There are signs that is changing and commodities may be on the rise. There have been significant rallies in precious metals including gold and silver. Also on the rise recently, crude oil – thanks in part to Canadian wildfires that have cut tar sands production. Tagging along with oil are gasoline and heating oil – both on the rise recently.
Thanks to a palm oil shortage in Asia, soybean prices have also seen a dramatic boost. A weak dollar adds fuel to the commodity fire. The caution expressed by the U.S. Fed and central banks in general may also help turn things around for commodities.
About Those Equities
Which all leads back to those related stocks. Investors who are not comfortable with investing in commodities directly may prefer investing in a related stock.
Thanks to its size, Exxon Mobil has had the luxury of being able to weather the collapse in oil prices. The company still made $4 billion to $5 billion per quarter in 2015 and if rising oil prices continue, the picture should only get rosier.
According to some analysts, once oil recovers before the end of 2016, Exxon will be a leader in the sector.
If Exxon were in mining, it would be named Potash. The company functions much like Exxon in the sense it has not been affected by the bear market in commodities as much as other smaller companies.
The stock yields an 8.8% dividend which represents a great play for dividend investors. Profits are consistent if not stellar. Some experts suggest, however, the dividend could see a cut if prices don’t rebound soon.
Monsanto is a giant among chemical companies. It’s proposed (and abandoned) play to buyout Syngenta has left the company hungry for merger material. Currently, Monsanto, Bayer and BASF are outside looking in at others in the space who have merged including the ChemChina buyout of Syngenta and a Dow Chemical Co. (NYSE:DOWC)/DuPont Co. (NYSE:DDC) merger currently seeking regulatory approval.
The possibility of a merger with another ag player plus a 2.4% dividend yield makes Monsanto an attractive option long term.
An ETF Option
For long-term investors looking for a low-cost option in commodities, U.S. News suggests taking a look at iShares MSCI Global Gold Miners ETF.
This fund tracks the MSCI ACWI Select Gold Miners Investable Market Index and generally invests 90% (or more) of its assets in the securities that make up that index.
Year to date the fund is up 103.5% and has a 1-year return of 35.2%.