Commodity Roundup: How Are Commodities Impacting Stocks?
These days, the commodities markets are closely followed by all types of investors. It used to be commodities were a totally different realm of investments
reserved for only a select few who had an appetite for volatility.
But not anymore.
Now all you have to do is turn on CNBC. Chances are, someone will be talking about commodities within fifteen minutes of turning on the TV. And for good reason commodities impact on the stock market is undeniable.
So, how do commodities affect stocks?
Lets take a closer at the three major commodity groups energy, agriculture, and metals to see how they influence stocks
Energy
For stocks, no commodities are more important than energy commodities. Every company uses energy in one way or another. Businesses cant operate without heating and electricity and most companies use transportation or shipping in some form.
Heres the thing
Fuel, heating, and electricity are heavily influenced by the price of crude oil and natural gas. In most cases, when those commodity prices rise, it hurts a companys bottom line.
Large companies tend to have greater reliance on energy commodities than the smaller players. Though many penny stocks also feel the sting of rising energy costs. And certain industries, like airlines and manufacturers, are impacted more by energy prices than other industries.
Of course, energy companies themselves usually benefit from higher prices. Just look at an oil companys profits and youll see how well they do when crude oil hits $100 a barrel.
In the world of penny stocks, oil and gas exploration companies can obviously thrive when energy commodities rise. At least, as long as they actually discover the commodity theyre searching for!
Agriculture
While energy may have the biggest impact on stocks, agriculture products are a close second.
The most important factor in agriculture commodity prices the price of food.
Clearly, restaurants, food wholesalers, grocers, and large retailers are heavily affected by agriculture prices. But heres something else to think about
Everyone eats.
You see, the more money the average person must spend on food, the less they have for other products and services. So, higher agriculture prices can lead to lower consumer spending overall. (The same concept holds true with cotton prices and consumer spending on clothing.)
Many companies in the agriculture sector are of the larger variety. However, there are several smaller players in the restaurant industry.
Keep an eye on agriculture prices theyre historically high right now. But if they drop, some of the small cap restaurant stocks could become compelling buys.
Metals
The metal commodities may not hold the same importance to retail consumers as energy and agriculture, but theyre a big deal to many businesses. And theyre particularly relevant to industrial companies.
Of course, mining companies (many of them small cap) are directly impacted by metal prices. Another obvious association is between precious metals and jewelry companies.
But that barely scratches the surface
Copper is used extensively in construction and technology. The automobile industry is the largest consumer of platinum. Silver is an important precious and industrial metal. And manufacturing companies can use everything from aluminum to palladium.
Keep an eye on copper prices. Copper is used in so many different products, its price can be a good leading indicator of economic activity. For example, rising copper prices often precede an economic expansion.
Heres the bottom line
Energy, agriculture, and metals commodities can all have significant influence on the price of stocks. Sometimes commodities are a reason to avoid certain companies. Other times, they provide a good reason to make a shrewd investment.
Yours in profit,
Gordon Lewis
Category: Commodity Stocks
