Don’t look now, but almost every commodity price is setting a multi-year high. The boom in commodity prices comes at a time when U.S. large-cap equities are, by almost any metric, selling at historically high prices.
Something is bound to give and Invenomic Capital’s Ali Motamed, who is participating in a webcast debating value versus growth with RiverPark’s Mitch Rubin on Thursday, thinks it could be stocks. “There isn’t a commodity that isn’t exploding,” he said. “And this is the most expensive stock market in history.”
In his view, the stock market’s narrative is completely one-sided. Goldman Sachs is predicting the S&P 500 will finish 2021 at 4,300 and Blackstone’s Byron Wien calling for a year-end target of 4,500. Both predictions appeared to be framing the upper end of the range.
History indicates that whenever equities have stood at current levels before they’ve suffered a 50% or 60% bear market, Motamed maintained. “I’m not saying that will happen,” but it’s a scenario investors should consider.
Motamed, a former Morningstar manager of the year who runs a long-short fund, believed that markets are at a major inflection point—and the factors that drove stocks and bonds for the last 40 years like falling interest rates and disinflation are disappearing in front of our eyes. "The only way to make money [in the next few years] is to be long value and short growth," he argued.
What few notice is the potential for inflation, which gathers steam if the Biden administration is successful in passing its proposed $1.9 trillion stimulus program. Copper recently set a five-year high of $3.80 per pound.
Most other commodities are sitting at three-year highs. Supply chain disruptions caused by the pandemic could take years to repair. Over the three months ending February 12, the Direxion Auspice Broad Commodity StrategyETF is up 11.89%.
There is currently a housing boom underway and Motamed estimated the surging cost of lumber is raising the price of new homes by more than $50,000. “All the math points to higher inflation,” he said.
Yet central bankers remain obsessed about deflation. Motamed was interviewed before an ice storm shut down several major oil refineries in Texas.
Bonds were off to their worst start of the year since 2013 and, if rates keep rising, they could eventually threaten long-duration assets like tech stocks, said Motamed. Liquidity provided by the Federal Reserve has helped mask some inconvenient truths lurking beneath the major stock market indexes.