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Supercycle!I am not talking about a double secret Peloton bike that only Skull and Bone members can buy. This is also not about Superman riding a bicycle. When it comes to the markets, supercycle refers to an asset class experiencing a long-term move in the same direction. Generally speaking, the asset class sees new highs at least every six months and there is a persistent nature to the uptrend. There have been many supercycles in my lifetime, a few of which are still going on.
Another term for supercycle is secular move. In the institutional space, saying that stocks are in a cyclical bull market means a typical four year move up followed by a 35% bear market that should last 14 months. Declaring that stocks are in a secular bull market means any selling in stocks will turn out to be much shallower and more short-lived than a full-blown bear situation, and that stocks will keep pounding higher for several years. From March of 2009 to the present day, equities have been in a secular bull market. A supercycle.
Bonds were also in a supercyle (notice I used the past tense) from 1981 until last year. After peaking at almost 16% in 1981, the yield on the US 10-year bond fell to under 40 basis points during the covid crash. It is currently at 1.54%. For 39 years there was a persistent nature to falling bond yields (which results in rising bond prices), with bond investors reaping returns from interest payments and higher prices for their bonds. This four-decade move has had far reaching implications that have touched almost every aspect of our lives. Inflation was considered dead, until recently. The stock market has done amazingly well, creating unprecedented levels of wealth and the standard of living in most of the world has improved dramatically. Compare this to the 1970’s, the last time inflation was a problem in the modern world. Supercycles can have that type of affect.
This is a chart of the US 10-year bond yield, going back to 1980. It is a monthly frame on a log scale. Using the log scale allows us to see how the bounce from last year has been the largest % upside move in history. The red line is the 200-month moving average, and I expect yields will react near that line if they get there in the next year or two.
There are a few important points to remember regarding this discussion. First, just because the bond market supercycle is over does not mean that bonds are now in a sypercycle bear market. It is too early to tell. We know a cyclical bear market is happening right now, but we don’t know how if rates will continue to move higher for the next several years. If rates eventually break above the red line, along with a move above that last major swing high in late 2018, odds will increase that a very long-term move is in place. Until then, it is best to avoid bonds but don’t fall into the camp of runaway yields like the 1970’s.
Inflation is picking up this year as interest rates have gone higher. It has been enough so far to give a lift to the commodity sector, with oil prices just off multi-year highs, hog and cattle futures seeing upside runs this year and farm land prices near all-time highs. Corn, wheat, beans, sugar and coffee prices have all seen huge spikes since last year. Obviously, this is all correlated. Does it mean, however, that we are about to enter a commodity supercycle? A little pick and shovel work should help us figure that out.
Just like the S&P 500 is the most important stock market indicator in the world, the US 10-year bond rate is the indicator to watch for inflation and commodity prices. Everything depends on how high the yield goes over the next 12 months.
Here is a chart of the 10-year rate on a weekly frame. It has a bit of an ascending triangle to it. That upper purple line must be broken before any further discussion of a commodity supercycle.
The chart suggests yields are going higher over the next 12 months. That will support oil prices and keep the agricultural commodities in their uptrends. If this is the early stage of a commodity supercycle, an interesting disconnect could take place from what many expect.
Traditionally, oil has been the largest driver within the commodity asset class. Supercycles last years and sometimes decades. If food and industrial and precious metals are embarking on a multi-year uptrend, oil could easily be left behind starting in a year or two. I believe we will see a tremendous drop in fossil fuel use over the next 20 years, which will decimate the oil industry. Silver, copper, corn and bean prices can keep going higher in this situation, but oil could see a gradual decline after this initial move matures next year.
For now, the idea is to stay away from bonds and stick with the commodity plays, if that is right for you. There are two ETF’s that offer perfect exposure to the commodity world without oil. DBA is an agricultural ETF, holding corn, beans and the meats. DBB is an industrial metals ETF with major holdings in nickel, tin and zinc.
Omicron is a thorny issue, and I appreciate that many of you are concerned. Centurions that have been with us for a while are not worried about their investments, as Club Romulus and FIRMUS keep us solid in that regard. There are more important things in life than money, however, and I am also thinking about the safety of my family. A little perspective here might help.
Remember that precautions, vaccines, therapies and common sense all help. Even during the Delta variant surge, hospitalizations and death rates continued to fall. This new strain out of South Africa seems to be less severe than previous variants. It may be more contagious, but the symptoms of patients so far are not as challenging.
The world is accustomed to this new normal. This one fact will mitigate the worst that Omicron can do.
Big tech stocks have out-performed since Friday due to trader memories of post-covid crash markets. Stocks like Zoom adn Netfilx, however, have barely budged. And while Moderna stock is up, a majority of the health care sector is flat to down. This shows the long-term institutional money is not positioning for a return to the spring and summer of 2020.
Stocks became very oversold on a short-term basis on Friday, leading to a quick rebound yesterday. With futures down a lot this morning, obviously, sellers did not finish their work. Some areas of the market, such as small caps, financials and oil, are approaching oversold status on an intermediate term level. This should create buying opportunities in these sectors soon.
Dating back over 80 years, bear markets have almost never materialized without some degree of negatively divergent behavior between price and the internal condition of the general market. As of November 8th, when all major indexes hit new highs, there was little evidence of negative divergences. This increases the odds that the current correction is not the start of a new bear market. Instead, it is a normal pullback that should result in new highs in coming months.