As I sit here writing this column (Jan. 20), it appears to me that a major shift is starting to take place between investments in financial assets vs. commodities.
Over the past four years, if outside investors had a choice about where to put money, there's no question they would have been better off investing in the stock market than in commodities - particularly ag commodities. While this is a risky prediction to make, I strongly believe that's changing. The stock market is now peaking and most commodity markets are bottoming. Over the next year we'll see an increase in funds flowing away from stocks and into commodities - just what almost all farmers would like to see.
Why a trend change now? First, let's take a look at the stock market. The chart of the Dow Jones Industrial Average below (see printed article) shows a clear five-wave top with a confirmed sell signal on Jan.18. If technical signals are worth anything, this is one of the more obvious to occur in recent years. Because the popular opinion is that the stock market can go nowhere but up, this could be a major top since the majority of investors are normally the most bullish at highs. Let's also keep in mind that all bull markets eventually come to an end - remember the grain markets in 1996.
From a fundamental point of view, it's hard to justify additional strength in the stock market. In the last year, the bull market in stocks has been led by high-tech and Internet stocks, combined with overseas stocks. The majority of other stocks closed 1999 closer to their 52-week lows than to their 52-week highs. If you take out all the high-tech stocks, the overall market has actually been in a bear move for the last 12 months.
Stock prices are trading at the highest multiples in history - also a negative sign. The bull's best argument at this stage is that the stock market, somewhat like farmland prices, is a cash-driven asset and not necessarily based on returns. The more cash that's available, as long as people are willing to invest it, the higher the market goes. But it's my theory that cash will eventually flow out of this market just as quickly as it flowed in.
Now the good part. The Freedom-to-Farm law allows farm prices to go higher during periods of shortages and lower during periods of surpluses. Most farmers like the first half of that equation better than the second half. But, on the other hand, we've just gone through the second half of that equation as grain prices essentially "flushed out" last August. Corn, soybean and wheat prices all overextended to the downside based on their fundamental value, which should now result in an over-extension to the upside.
No one ever knows for sure what's going to cause the next bull market. It could either be a sharp increase in demand, which is hard to measure,or weather problems. But one thing we do know for sure from basic economic theory is that, if you keep any commodity price too low for too long, someone will find a good use for it. Over the next several months, I'm confident that will result in significantly higher prices in the grain markets. I also believe you'll see cash start flowing out of the stock market and into commodity funds, which will be a big plus for American farmers.
Parting Thoughts. In 1999, a small percentage of farmers had a terrific year financially while many didn't have to worry about paying income taxes. The year 2000 will be one of happier times for more people as grain prices will rebound, bank accounts will get fatter and, hopefully, many people will be able to forget the hard times of the past couple of years.