Goldman Gets Giddy on Commodities

When a top investment bank reverses course and makes a bullish call on a sector, it’s a good idea to pay close attention.

This week, Goldman Sachs (GS) upgraded its outlook on commodities and basic materials. Analysts say the segment is poised for a strong run next year — with prices for oil, coal, iron ore, nickel and zinc all likely to rise.

The upgrade on the basic materials sector to "Overweight" was the first time GS has made such a move in four years.

According to the Goldman note, as quoted in TheStreet.com:

"We believe the recent reacceleration in global PMIs (purchasing managers’ indexes) suggests commodity markets are entering a cyclically stronger environment … Supply restrictions from policy actions should benefit oil, coking coal and nickel in the near term while economic reductions should boost natural gas and zinc."

So, what does an upgrade to "Overweight" mean in terms of actual expected percentage upside?

Goldman analysts think that commodities as a sector, as tracked by the Goldman Sachs Commodity Index, could jump 9% over the next three months. That forecast represents a huge turnaround from the previous forecast for a decline of 2%.

The question now is … why the change of heart?

The most-obvious answer here is that commodity prices — particularly industrial commodities and basic materials — are charging higher. This is happening in anticipation of a Trump administration and a compliant Republican Congress ready to act on the promise of a $1 trillion infrastructure spending spree.

Big spending on big infrastructure will cause a big boost in demand for basic materials. And prices are adjusting to that potential outcome accordingly.

Yet here, Goldman cautions investors not to jump to this conclusion.

Per the TheStreet.com article:

"It is tempting to blame the sharp post-election rally in industrial metals prices on President-elect Trump’s platform of lower taxation and higher public spending on infrastructure … We would argue this rally was a continuation of a reflation trend put in place at the start of 2016 by the Chinese through credit stimulus aimed at infrastructure projects and policy-driven supply curtailments in coal."

The overall reflation trend certainly has had a hand in pushing coal and iron ore prices higher this year. But I think Goldman is understating the "Trump effect" when it comes to the latest boost in the segment.

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All we need do is look at a recent price chart of the benchmark basic materials fund, the iShares U.S. Basic Materials ETF (IYM), to see the reversal of fortune that took place on Nov. 9.

As you can see, the price of basic materials had been trending lower in the two months preceding Election Day.

Then, not coincidentally, the sector soared on Nov. 9. That’s when traders began pricing in the pro-growth policies, as well as the infrastructure buildout, that’s at the heart of the president-elect’s economic proposals.

Now, while it may be tempting to jump into a sector like basic materials on the promise of a Trump "reflation trade," I think it is a bit premature right now.

There are still numerous unknowns regarding what a Trump administration will do, and what kind of infrastructure buildout will occur … and at what pace.

Still, it is safe to say that the Goldman call is a step in the right direction. It recognizes a reversal of fortune for the industrial commodities and basic materials sector … a reversal that, if sustainable, will be a leading indicator signaling future economic growth.

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One thing to keep in mind here …

It was just in July that Goldman forecast a 10% plunge in stocks and then a recovery that would put the S&P 500 at 2,100 at year-end.

I’m glad we’ve been telling you to stay watchful, but active, in the markets all along. The S&P 500 started today at 2,200 … and we have the month of December still to go.

As you’ll see in tomorrow morning’s edition, December is the third-best-performing month of the year. Grant Wasylik will show you just how well it does, why that matters, and some things to consider as you approach your year-end portfolio review time. Keep a close eye on your inbox around 8:30 a.m. Eastern tomorrow to learn more.

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Do you think commodity, and basic materials prices are going to continue to trend higher in the months to come? Are you excited about the Trump "reflation trade?" I’d very much like to find out what you think, so please let me know by leaving me a comment on our website or sending me an e-mail.

***

It was another day of milestones for the markets. After yesterday’s trio of record closes, today the Dow Industrials, S&P 500 and Nasdaq notched a second-straight day of new closing highs.

The gains were small (+0.35%, +0.22% and +0.33%, respectively). But the levels are notable. The Dow surged above 19,000, the S&P 500 is above 2,200 and the Nasdaq is closing in on 5,400.

For the Dow, this move reflects a 1,000-point gain in less than a month. Elsewhere in the news…

• Another prediction from Goldman: Analysts said today that we could see a 30% surge in share buybacks next year above 2016’s figures, amounting to some $780 billion. This would be thanks to possible corporate tax reform, and companies bringing home cash from overseas operations. This could also result in a dividend boost.

• Washington state spent almost as much on pot as alcohol in the second quarter. Consumers spent $249M on spirits and almost $212 million on marijuana, which was approved for recreational use in 2012.

• Healthcare was the only S&P 500 sector to end the day in the red. It was weighed down by Patterson Companies (PDCO, -16.7%) and Medtronic (MDT, -8.6%) after weak earnings from both.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “Goldman Gets Giddy on Commodities”

  1. Brad-
    Goldman-Sachs is not a company with a history of integrity. Why do you use them as an authority?

  2. The problem is that the ‘Trump reflation trade’ has already taken commodities past their August highs, and any significant further rise may require actual action in Congress. Since these sorts of actions aren’t on Trump’s 100 day to do list, it’s very possible we may see a pullback before another step higher. So tread cautiously.

  3. Not so sunny Conjecture; So lets assume recent flow into stocks are steady and on the rise, now companies are dependent on trust in times like these, so lets assume a rise in commodities – that explains 40 percent of the action. The rest is noise.
    Trumponomic drive into tarmac and cement, into technology – but some are left in doubt due to rising interest (Housing and Construction).
    Sure Gold can rise, financials can too and some of stocks – thin hope!
    All seems to scream WE WANT INVESTMENTS – heady days ahead
    Safe bets are SOLAR and GAS (boring stuff, but I´d rather be boring).

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