By Tom Burnett CFA
The big story in the markets for 2021 is the widespread increase in commodity prices through late February (all prices are sourced to the February 23, 2021 Wall Street Journal). Led by the Energy sector, prices have recovered sharply from the Covid-19 impact during the 2020 year. For example, gasoline prices have risen by 31% this year. Similarly, crude oil prices are up by 27% to the $62 level last seen in early 2020, before the Covid outbreak weakened the global economies. But the 2021 price recoveries are not limited to the energy sector. Copper prices have risen by 18%, and foodstuffs such as corn (+14%) and sugar (+21%) have also experienced a strong uptrend. Overall, the Bloomberg Commodity Index has increased by 11.1% in the first seven weeks of this year.
The major stock indexes have risen also, but at measurably slower rates. The NASDAQ Composite is up 5.0%, the S/P 500 up 3.2% while the Dow Jones Industrial Average has risen 3.0%. Bonds have performed poorly thus far in 2021. The index of long-term Treasuries (20 years or more) is down 9.9% as rising interest rates have pushed bond prices lower. The index of high-grade corporate bonds is down 4.2% this year and the Municipal Index is down 0.9% in 2021.
Many observers see this growing price trend as a signal of future inflationary pressures which have not yet shown up in the macro/GDP statistics. One concern comes from the Federal Reserve policy of accommodation that began as the Covid pressures punished the global economies. For example, the Fed has increased its balance sheet assets from $4.3 trillion a year ago to over $7.5 trillion in the most recent period. This “easy money” policy has generated a material increase in the nation’s money supply over the past year. For example, M2 which includes all bank deposits and money-market funds has grown by 26% from its level of one year ago. M2 now stands at $19.5 trillion, almost equal to the latest real GDP figure of $20 trillion. Analysts have begun to comment negatively about this rapid money supply growth as a harbinger of future inflation. Clearly, the early 2021 price movements in the world of commodity prices have begun to incorporate these inflationary pressures.
Tom Burnett CFA is Director of Research