What this commodities ratio could say about the year ahead for equities
S&P 500 TECHNICALS
Today begins day one of the traditional two-day deluge that is US labour force reporting. Earlier today, we had the US ADP report and JOLTS job openings. There used to be a reliable correlation between the ADP report and non-farm payrolls (i.e. the main, government-produced jobs report) but that correlation detached during the pandemic.
Finally, there's a speech from Fed Chair Jerome Powell at the Brookings Institution in Washington. Remember, the last time Powell made a major public appearance, he shot the markets' hopes of a pivot down.
Copper is a bellwether for the global economy - it does well when industrial activity is strong (if you don't believe me, take a look at the price of copper before China went into lockdown). In contrast, gold is a precious metal that is considered a form of money. It's a safe haven when risk assets are going bad and it also does well when people look for hedges for lower real rates.
But when you pair the copper spot price to gold spot price ratio and stack it up against the S&P 500 EPS ratio, there is (usually) a fascinating correlation in terms of performance. If 2023 really does mark a return to normality in markets, then be prepared to see the equity market turn lower again next year.
CHART OF THE WEEK
My chart of the week takes a look at the growth vs value trade - and how long it took for growth stocks to recoup their losses following the burst of the dot com bubble in late 1999/early 2000. Value, in contrast, continued to climb until the end of 2006 when that investment strategy finally started to roll over. Perhaps it suggests value could be in for a multi-year period of outperformance.
Note: This weekend's episode of The Rules of Investing with David Thornton will analyse the new regime for growth-oriented investing with Sam Ruiz of T. Rowe Price. Follow the profile to know when the episode goes live.
STOCK TO WATCH
Just one stock to watch today, and it's not a finger-lickin' good one. Following its November full-year result, the share price of Collins Foods (ASX: CKF) was well and truly fried. The broker observes price increases can only go so far and that rising inflation and interest rates are likely to put a brake on consumer spending. The price target is kept at $8.20/share.
Hans Lee wrote today's report.
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Australia's most comprehensive markets wrap is back for 2023, with a fresh look and a new emphasis on getting you and your money ahead of the curve. Available each weekday morning at 8:30am AEDT. Written by Chris Conway, Kerry Sun, and Hans Lee.