Are Commodities Driving Stocks? Excel Breaks It Down: Macro View

(Bloomberg) — If oil and industrial metals are poised to trade on better global growth prospects, then it’s only natural for the S&P 500 to follow their cue. After all, stocks are meant to price and anticipate changes in the underlying economy. But is that what’s driving the market higher right now? I made a bet with colleagues it was. But here’s where that theory breaks down.

• First let’s start with a very simplistic correlation between the S&P 500 and the Bloomberg Commodities Index. Their 66-day correlation has been strengthening over the past two months. My colleague Abigail Doolittle pointed out that when stocks and commodities diverge, it can portend a big selloff for both, which tends to happen around corrections or even bear markets but can take weeks or months to manifest. We’ve seen several examples of this on a smaller scale throughout the summer. So naturally, you might suspect sensitivity to commodities to be growing among equity investors. But is it a driving factor?

• To find out, my colleagues Eddie Van der Walt, Cameron Crise and I created a multi-security regression analysis that looked at the impact of 10-year Treasury yields, the dollar and crude prices on the stock market using five-week changes. The analysis was designed to show which of the three might be the best asset to watch in terms of where stocks go next. Cam suspected rates were the statistically significant variable, but I stuck to my commodities theory.
• Running a regression with the S&P 500 as the dependent variable and the three suspected drivers as the independent variables, we created a theoretical model of returns based on what the stock market should have looked like. The model proved to be strong with the actual market not far off, only outperforming marginally.

• Crude and the dollar were statistically significant drivers but its turns out 10-year yields were ultimately the biggest factor, at least on the surface.
• At the end of the day, I wasn’t necessarily wrong. Commodities and stocks, as risk assets, are usually on the same page, but it seems stocks have more closely followed what rates traders have been saying for ages: bonds know best. Note, there is no guarantee that a move in one asset is causing a move in the other and volatility and scale aren’t being taken into account. But these cross-asset relationships are still worth keeping an eye on nonetheless.
• NOTE: Kriti Gupta writes for Bloomberg’s Markets Live. The observations she makes are her own and not intended as investment advice. For more markets commentary, see the Markets Live blog.

–With assistance from Eddie van der Walt, Cameron Crise and Abigail Doolittle.

To contact the reporter on this story: Kriti Gupta in New York at kgupta129@bloomberg.net To contact the editors responsible for this story: Mark Cudmore at mcudmore8@bloomberg.net Jennifer Bissell-Linsk

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This message was originally sent to ASHLEY JOYE via the Bloomberg Terminal.