Global growth is tepid, few would dispute that, but markets are typically influenced by changes at the margin.  Global stocks and most risk assets, including oil, bottomed on February 11. Since then, the S&P 500 stock index and non-US stocks (as measured by Datastream) are up about 14% as of Friday.

Despite our consistent view that lower oil prices are a net benefit to the world, it is undeniable that stocks in the US and especially outside the US have struggled to make any ground since mid-2014, when oil prices peaked.

David Fuller's view

Here is a PDF of The Weekly View.

At this stage of the global stock market cycle, seven years plus to the upside for Wall Street and a few other developed markets such as New Zealand and Denmark but considerably weaker for most other global indices, we can expect more volatile ranging.  Most shares are not cheap.

This year’s best news has been the weakening of the Dollar Index.  Had it broken decisively above 100, as plenty of institutional speculators were betting, the USA would have been considerably more susceptible to recession.  It would have also caused more problems for countries which had borrowed US Dollars when the currency was considerably weaker.  I credit surreptitious intervention by the US Treasury on behalf of the Federal Reserve for weakening the greenback.   

Additionally, there is a growing belief that China is finally coming to grips with its problems.  Let us hope so, because the world’s second largest economy has considerable influence.  However, China’s conundrum is that no command economy leadership has figured out how to move from a developing to a developed basis in the modern era, let alone one largely ruled by one man.  The world economy will be better off if China succeeds, but watch out for further turmoil if / when the PRC devalues. 

While the USA and China grab most of the headlines, investors are discovering that contra-cyclical commodities and especially commodity shares are way out in front in terms of this year’s best gains.  This starts with short covering and typically occurs late in multi-year bull market cycles. 

You probably know the old adage: the cure for low prices is low prices.  When commodities trade persistently below the average cost of production, as we were seeing in many instances during the second half of 2015 and 1Q 2016, supply declines.  Marginal producers fail and even big blue chip commodity companies curtail development programmes and reduce their workforce.  Government-led commodity producers can slip into turmoil, as we have seen with Argentina.     

As supply wanes, commodity prices start to record their best recoveries for several years.  Some observers who know these markets best are among the last to believe it, because they have been disappointed too often. However, you can see it on the charts.  Here are a few examples: Brent Crude Oil – Iron Ore – Silver Spot – Tin Spot – Palm Oil – Soybeans – White Sugar.

Lastly, this article from Macquarie, published on 19^th January 2016, describes the characteristics near the bottom of a commodity cycle very well: ‘The world simply hates commodities at the moment’.