First Quarter Wallops Markets-Oil Up 33%

While stocks wallop, commodities woke from decades of hibernation rising 25% in the first quarter of 2022. Shaken by Covid fatigue and the onset of war, oil peaked up 60% at one point, from 2021's close, to end the quarter 30% higher.

CRUDE = NYMEX May 2022 WTI Crude Oil Futures Contract

DJP = iPath Bloomberg Commodity Index Total Return(SM) ETN

GOLD = COMEX June 2022 Gold Futures Contract

SPY = SPDR S&P 500 ETF Trust

BND = Vanguard Total Bond Market Index Fund

QQQ = Invesco QQQ Trust (Nasdaq 100 ETF)

Crude oil led the commodities charge. DJP, a mix of energy, metals and agriculture, clearly shows the effects of inflation.  Gold bulls were disappointed. Stock investors posted losses for the first time in years. Bonds ticked lower on the tails of higher inflation.

Note the above, while representing indexes and asset classes, are all easily investible by small investors. They closely track their intended assets and are good representatives of market conditions.

A single quarter represents current conditions and is not a view of the current outlook. For that, we need to evaluate the medium and even long term market performance. The last three years offer a unique view of markets, including the largest declines and largest recoveries in decades-extreme markets-all compressed in the 2019 to 2022 period!

PRE AND POST COVID

To gain this perspective let's look at the pre and post covid years:

All markets posted gains for the 2019 to present period. While the Nasdaq 100 led the way, oil bested the S&P while commodities showed lesser but still respectable gains.  Stocks were relentless, even shaking off 2019's 50% decline. The oil chart is a bit deceptive as the month-end closes charted here do NOT reflect the daily nor intra-day highs and lows. The NYMEX WTI April 2020 crude oil contract touched MINUS $40.32 on 4/20/20 a day ahead of its expiration. Crude oil traded in low digits for a number of days. 

LONG TERM MARKETS

This 14 year period is defined by the BND start date in 2007, otherwise we could not make year to year comparisons.  And this period is marked by crude's all time high of $147.27 on 7/11/2008 in the August 2008 contract. So, of course, crude oil is off. 

The other major markets are about where we expect them: QQQs lead, SPY next, Gold doing ok, even BND has a return and commods are on the way to their two decades long depression. Eventually though, gold is brought down by the commodity decline. 

OUTLOOK

For one thing the world is now all shook up by not just Covid, but, war, too. 

Maybe the recovery in oil emboldened oil states to flex muscles they haven't had in years. Maybe that emboldened Putin to go to war. As we know from Afghanistan and Vietnam before it, war can last for years. So Covid will pass. We don't know when but that alone should help stocks. 

The initial inflation increase may have been Covid/supply chain related but war may keep a bid on commodity prices. Although, 20 years of Afghanistan war did NOT. 

Regardless, demographics are keeping the US economy going. Job takers are few as the Great Reitrement of the existing aging and prosperous workforce becomes a tsunami. The fast and furious recovery of stock markets in 2020 and 2021 point to strong recovery, again.

Why choose these markets? Why ETFs? Why actual crude and gold futures contracts? Its all about the ease of investment for smaller investors and how well these vehicles represent the markets as a whole. Generally ETFs let small investors do what only large players could do for even less cost than large players. But commodity ETFS for oil and gold do not reflect their underlying markets very well. That's why I use the futures contracts. Today, using "Micro" contracts, even small investors can own crude oil and gold futures responsibly. 

Why "cherry pick" these time periods? They are not cherry picked. This has been such an extraordinary quarter (the Nasdaq is DOWN the most!) I could not ignore it. 2018-present is explained above as a period of extreme market moves-an ideal laboratory for analysis. As for 2007, that again was explained as the first year that the BND traded. To make these analyses valid we cannot change symbols midstream. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal