Parabolic Commodities Rally Darkens Economic Outlook

The parabolic rally in commodities since the Russian/Ukraine war began threatens not only to cause even larger jumps for CPI, it’s also darkening the outlook for the world economy. Global GDP growth is now seen at 4.0%, down from 4.3% before the war started, according to Bloomberg’s survey of economists.1

Investors are concerned the soaring cost of living may cause stagflation (meaning slow GDP growth and high prices), or a recession. Stock and bond markets experienced large swings this week as investors grappled with a multitude of possible economic outcomes caused by the war and the reaction in markets to the fallout from the West’s sanctions and Russia’s responses.

For the average American, they’re likely going to feel the initial effects of the commodities rally at the gas pump and in the supermarket. In the first nine days of March, the national average gasoline price rose 19% to a record $4.32 a gallon2. The cost of food will likely rise, too. U.S. wheat futures soared 29% to a record in the first seven trading days of March, while corn futures were up 5.4%, according to Bloomberg data. That comes on top of last month’s gains of 21.9% and 11.4%, respectively, for those futures contracts.

To be sure, there are offsetting positives that may soften commodities’ impact on the U.S. economy and American households – read our Big Number on oil prices and U.S. incomes.

We think the uncertainty and unpredictability of the war’s direction, and the market’s reaction to the fast-changing situation, could create a market environment where tactical, active investment management can be used for goals-based investors. Equity market returns are already quite different this year as traders parse where the war’s pain could be most intense. European stocks so far have borne the brunt of it. The MSCI Europe index was down 12.9% year to date through last Friday versus a loss of 9.4% for the S&P 500 and 7.2% for the MSCI Asia Pacific Index, according to Bloomberg.

There’s a divergence in performance in the bond market, too. Surprisingly, the junkiest bonds, rated CCC, have outperformed amid the war’s financial and economic jitters. The Bloomberg Caa U.S. High Yield Index was down 3.3% year to date through March 4, compared to a 5.4% loss for the Bloomberg U.S. Investment-Grade Corporate Bond Index.

We understand that for goals-based investors, roller-coaster markets may drive a desire to mitigate risk amid heightened fears of stagflation or a recession. Horizon Investments offers the Risk Assist  strategy, which is designed with a disciplined, automated process to dynamically “de-risk” a portfolio during times of severe market stress. In doing so, it seeks to curb the behavioral investing impulses that can derail financial plans. Risk Assist  also uses an automated process to ‘’re-invest’’ as market conditions improve, with the aim of keeping clients on track to achieve their goals.