Commodity Insight: A lump of coal for the New Year

When the New Year arrives, I am quick to mention the market forecasting indicator, the “January Barometer” developed by Yale Hirsch, creator of the Stock Trader’s Almanac in 1972. His research found that the direction the S&P (all stock markets) takes in January is a reliable predictor of full-year returns with 85.7% accuracy. Anytime a reliable indicator, a forecasting tool, has an accuracy rating of 85.7%, it catches my attention.

A year ago, the January Barometer at the end of January flashed a signal that 2022 was going to be a rough one for stocks and possibly commodities. With the benefit of hindsight, such a signal was accurate. On Oct. 1, 2022, the Nasdaq had shed nearly 33% in value and Dow Jones was down 20%. It was, at the time, the worst year for stocks since 2008. And the world’s best-known cryptocurrency, Bitcoin, lost nearly 60 percent in value.

Of course, not until Feb. 1, 2023, will it be known for sure what the “January Barometer” is forecasting for the New Year. Only time will tell.

But this week there were a host of markets suggesting the New Year may be another tough one for the bulls. Understand that 2022 began as far more bullish commodities than bearish. However, there is enough weakness now flashing everywhere with commodities, per se, it seems as if the New Year ahead is going to be disappointing for the bulls. Here are some thoughts I posted in my twice-a-day newsletter, Commodity Insite, a few days ago.

From the Dec. 12 morning edition of Commodity Insite posted at 6 a.m. Chicago time:

“Coming into Dec. I thought the month as a whole would be very bearish. I stated repeatedly, ‘look for outsized weakness in December.’ And all in all, I was right.

“Thus far, the best-performing commodity markets in December are but two, soybeans and soy meal. But soy oil is one of the worst performers ... the past two weeks. Plus, wheat fell to a four-month low, as did corn. Cattle and hogs did nearly the same early last week. Crude oil slumped more than $12 a barrel (down 11% for the week!) the past two weeks and is back to where it was in the early days of January. And the major commodity indexes are also back to where they were in early January, as well. Other than soybeans and meal, there has been little bullish about the month of December. And by any reasonable measure, the month is showing outsized weakness with most markets including stocks and equities.

“Do note, as well, that Friday, the Dow fell 305 points to a new one-month low. It was also the worst week for the Dow and other stock indexes since September. Last week, stocks and commodities did poorly. Certainly, the month has a few more weeks to go and things may improve. Or, they may get worse.”

I penned all that before the most recent CPI (inflation) report was announced.

The CPI report showed a rise of 7.1% compared to a year ago. The report was wildly cheered by Wall Street as it showed less inflation than expected. Still, for the month of November, it was still the largest year-over-year gain since 1981. Wall Street was quick to embrace the data in the report but the fact is, inflationary pressures remain.

And the very next day, the Fed hiked interest rates by 0.5% to levels not seen in 15 years. And following the rate hike, Fed Chair Jerome Powell gave a speech and answered questions about monetary policy moving forward. From Insider.com: “Fed Chair Powell took an aggressive stance at the podium Wednesday, effectively saying the central bank isn’t done hiking rates.

“The Fed signaled it won’t be taking its foot off the gas anytime soon with policy, but markets of late have been acting like a so-called Fed pivot is all but guaranteed.” Insider.com went on to write, “But the more the market ignores the Fed, the longer the Fed will have to keep monetary policy restrictive, which ultimately raises the odds of a recession.

I viewed Fed Chair Powell and his speech as being Ebenezer Scrooge-like from Charles Dickens’ “A Christmas Carol.” What he and the Fed did was to give Wall Street, Main Street, investors, traders, ranchers and farmers a lump of coal for Christmas and the New Year. Humbug you say? We shall see.