8, 2008 -- For the balance of the year and well into '09, the Big Four; stocks, bonds, currencies and commodities will be dominated by two economic forces vying for control of the marketplace. Consequently, investors, traders and agricultural producers are going to remain on an emotional roller coaster as markets and values rise and fall sharply. It will be a period of unprecedented volatility. Actually, it already is!
One economic force contending for the upper hand will be the fear of a recession, the r-word. The other force will be a fear of inflation, the i-word. It will be a constant battle between the two forces with one dominating the other until the situation is reversed. Neither force will gain the upper hand over the other as the pendulum swings wide one way and then back again.
The clash between a recession and inflation has spawned intense volatility for Big Four. Don't assume for a moment that volatility is a bad thing. It can be a friend or a foe. In fact, history shows there are far more opportunities to make (or lose) money during volatile periods than in stretches of time when markets are range bound. Volatility causes markets to break out of historical boundaries and plow into uncharted waters. And that is when and where fortunes are made. Or, as I said earlier, they are lost.
Here are some investing and trading suggestions for the Big Four. Some are based on the assumption the r-word will be dominant at the time. Other recommendations are based on the assumption the i-word will be the force to be reckoned with.
STOCKS -- equities are facing the proverbial horns of a dilemma with inflation not necessarily bullish and neither is slow economic growth. Yet, the market has to contend with both. I expect stocks to remain in a historically wide trading range with a downward bias. Rallies should be viewed with skepticism.
BONDS -- the market is being supported by fears of economic weakness. The recent surge in commodity prices, however, hints the pendulum is about to swing the other way as economic growth rebounds. Over the short run, the bears may gain the upper hand for the first time since August.
CURRENCIES -- the US dollar staged its biggest rally this week since June '06. There is a growing conviction that the slowdown in US economic activity will likely drag down the growth in Asia and Europe, forcing other central banks to lower rates just as the Fed is doing. If the US dollar continues to improve while the rest of the world's major economies begin to weaken, expect commodities to be slammed hard.
COMMODITIES -- the long term bullish trend for commodities will not be derailed permanently if the US economy slips into a recession. But over the near term, speculative enthusiasm, astronomically high prices, over bought conditions and the prospects of slow growth in Asia and Europe should combine to spark a much needed washout for high flying markets such as metals, grains and petroleum.
The key force supporting commodity values has been the US dollar falling to historically low levels. As recently as November 23 of last year, for example, the dollar slumped to a level not seen since 1973. If the dollar remains weak it is a given that commodities will benefit.
But the dollar did something this week not see in a year and a half. It showed unusual strength. If that scenario continues as I feel it will, many of those high flying commodities are going to be in trouble sooner rather than later. Do not discount so easily the bearish impact a strong dollar can have on high priced commodities.
For those looking for undervalued commodities that are genuine, "sleepers" I have two that should be watched and monitored carefully. One is natural gas that ended this week at its best levels since last summer. The other is cattle where futures and cash should hit new all time highs by late summer.
If commodities in general weaken in the coming days as the dollar strengthens, natural gas and cattle may also retreat. But use weakness to probe the long side. Both markets are headed much higher. My upside target for natural gas prices is not yet clear. For cattle, my target is crystal clear. Cash and futures are destined for the $115 to $125 level.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)