Few would argue that the last 12 months haven’t been some of the wildest financial times in history. Given all of the chaos that has happened in the last four to six weeks, if someone is not concerned about where we’re going to be 12 months from now, then I would make the assumption that they are just not paying much attention. These are some of the craziest times in history.
Think about what has happened. In 2021, the S&P 500 index gained almost 27%, a stellar performance. But over the first 15 trading days of January, the index gave back over 11%, the biggest correction since early 2020 when the index plunged 35% as the pandemic shut down the global economy.
Since early December, gasoline prices are up 28%, crude oil is up 34%, and diesel fuel up 31%. Lumber prices more than doubled from the first of November to January 19 and have since dropped 16%. This is possibly the most challenging time to run a business any of us have ever gone through. Combine all of this price volatility with the shortage of labor, and it is no surprise that business owners and managers are facing some of the most difficult decisions in history.
In some ways, price volatility is beneficial since, in some respects, that’s how profits can be generated. It's difficult to make money in markets where the prices just stay flat, but recent market volatility has increased everyone’s operating risk far greater than what most of us want.
So where from here?
That is the million-dollar question. Here are some of my thoughts. Many commodities have a lot in common. The most common fundamental understanding of any commodity is that if the price is too high for too long, someone will find a way to produce more of it or use something else. There are also times in rising markets where speculative inventories are built up, giving the impression that the shortage is more severe than it actually is. Then, when the market eventually begins to decline, those who have built up large inventories become concerned and start dumping them. A sharp drop in price then occurs.
This is what is likely happening in the lumber market as the trend has now turned lower. Take 10% off of the stock market and the housing market will slow down abruptly, and all of a sudden we are in a different world. It happens at every housing market top. It would appear as though that could be starting now.
A similar situation is even taking place in steel. Could well be taking place in fertilizer. If corn and beans stay at the current lofty price levels they are now, producers will have a profit incentive to increase acres both corn and soybeans acres, and as the old joke goes, “farmers will start renting the medians on Interstate 80 in Iowa.”
The bottom line
Be careful in markets like this. Just as the stock market gave back three months of gains in just a few weeks, that can happen in any market. When the trends turn, prices fall much faster than they went up. 2022 is not likely going to be a year that taking big risks will pay off.