Buying The Hard Stuff

Trading for the new year opened with commodities in the spotlight. Crude oil briefly traded up to $100 a barrel, thought we still haven't seen a triple-digit close. Gold popped up to a new record high and agricultural futures zoomed upward. The commodity frenzy is related to supply concerns but also may have something to do with activity in the bond market. Anticipation of further rate cuts by the Fed is driving the dollar down in relation to other currencies. This tends to be bullish for tangible goods like oil and gold. Indeed, energy and materials were the leading sectors by far in 2007.

At the same time, some of the latest economic statistics suggest that the U.S may avoid recession. If true, it would mean mean more demand for fuel and basic materials, hence we see rising prices for those things and falling prices for defensive sectors like health care and utilities. We could be on the cusp of an intermediate-term leadership change, but next week's data could easily lead to different conclusions.

While it may seem like the 2008 presidential campaign should be about over, in reality it is just beginning with tonight's Iowa caucuses. Within a few weeks it seems likely that we will know who the two parties will nominate. The market implications are difficult to predict. Election years tend to be bullish, but there are always exceptions. The prospect of major changes in tax policy, health care, and foreign trade regulation could certainly have a major impact on various sectors. This suggests we may be in for a volatile year.