A key debate with QE2 ending in June is whether the economy can continue its recovery without government support. If the pace of economic growth persists, higher risk assets such as cyclical stocks and commodities would likely continue to lead. And if the economy stalls after QE2, lower risk assets such as defensive stocks and bonds would likely benefit. In anticipating which result to expect, it is worthwhile to identify any leading indicators to the ultimate outcome.
In recent years, agriculture prices have provided a fairly reliable early warning signal, shifting roughly three months in advance of the stock market. For example, while the stock market peaked in April 2010 after QE1 ended, agricultural prices had already crested three months earlier in January 2010.
Today, we see the same trend starting to take shape. Agriculture prices peaked in early March 2011 and have been trending lower since. However, stocks continue to rise. If past precedence holds, the March top in agriculture prices would imply a peak for stocks in June 2011, which is also when QE2 is set to end.
The turn in agriculture prices is another signal that the broader stock rally may be nearing an end. Thus, a portfolio shift away from economically sensitive cyclical and commodities stocks toward more defensive consumer staples and utilities stocks as well as bonds may be prudent. These latter categories posted solid gains following the end of QE1 and have already begun to move higher ahead of the end of QE2.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
