Commodities poised for a run in 2018

PHOTO: A worker checks newly-cast copper anode sheets at the MMC Norilsk Nickel PJSC copper refinery in Norilsk, Russia, Oct. 19, 2017.
Andrey Rudakov/Bloomberg via Getty Images FILE
A worker checks newly-cast copper anode sheets at the MMC Norilsk Nickel PJSC copper refinery in Norilsk, Russia, Oct. 19, 2017.

While domestic and foreign economies hum along, fueling overall growth in the domestic stock market, related trends are likely to push up prices of commodities and materials.

Demand for commodities is increasing globally. Just about every economy in the world, depressed for years longer than ours after our woes from the 2008 financial crisis hit their shores, is now accelerating in what economists are calling synchronized growth because they seem to be rising in lockstep.

Already, the commodity of oil is headed upward, with long-depressed prices close to their historical average at about $60 a barrel. Trend data suggests that domestic energy stocks are gaining momentum against the energy sector as a whole relative to the S&P 500.

Some global oil producers might not extend production cuts, increasing supply and depressing prices. But Saudi Arabia, the planet’s biggest producer, is expected to do everything it can to increase market prices as Saudi Aramco, the state-owned production company, prepares to take part of the company public in 2018 and seeks to elevate prices for its initial public offering.

Analysts expect demand to rise for energy commodities, base metals and timber -- the building blocks of industry, manufacturing and construction. In turn, this would drive up earnings and stock prices of materials companies, which extract raw materials through mining, forestry and energy exploration.

Investing in commodities exchanges, even via exchange-traded funds (ETFs), can be tricky for long-term individual investors who like to sit back and not worry about sudden price fluctuations. But for those who stay on top of things, commodities-based funds and materials stocks present feasible near-term investing opportunities. Commodities have only had a place in the sun every so often, and the sun may shine brightly on them in 2018.

Reasons and indicators include:

An already rising commodities market. To a large extent, this recent robustness is rooted in metals, and the metal to watch is copper. Despite some sharp dips here and there, copper prices have held up in 2017, with lows considerably higher than in 2016, prompting bullishness.

A bellwether with a respectable record, highly-versatile copper is used in manufacturing, industrial processes, electronic products and plumbing. Copper is so reliably foretelling of the overall commodities market that the traders have dubbed it Dr. Copper.

Rising interest rates and likely increases in inflation. Commodity prices are joined at the hip with interest rates and inflation, so if you fear getting hammered by the latter two, you might as well benefit from the first. The interest rate on the 10-year Treasury bill, now about 2.5 percent, has been rising, up from about 2.17 percent two years ago. If this rate continues to edge up, this could portend rising inflation from decreasing unemployment and upward wage pressure.

The recent congressional tax legislation. An aspect of this bill that has received scant news coverage is the five-year moratorium on rules requiring companies to depreciate capital expenditures over many years. For the next five years, companies can deduct the full cost of expenditures for plants and equipment in the tax year that they spend the money. This will give companies a strong incentive to invest in capital equipment, which funnels down to more demand for base metals and materials, causing this investment to exploit high global demand and accelerate profits.

Of course, the commodities train and its caboose could be derailed. Problems in China, stemming from ballooning debt and tenuous credit arrangements, could decrease demand by the world’s biggest commodity consumer. Or a significant recession in the U.S., though unlikely, could throw cold water on the party.

But generally, the outlook for commodities and materials in 2018 is quite sanguine.

Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry. Neither he nor members of his family own shares of retail stocks.

Any opinions expressed in this column are solely those of the author.