More on Lumber And What It Means For Stocks

March 18, 2014
By Knowledge Leaders Team in Uncategorized

Copper is probably the best commodity indicator to track in order understand global economic strength or weakness because of its widespread use in infrastructure, houses, cars, electrical equipment, etc. In turn, lumber is probably the best commodity indicator to track in order to understand domestic conditions in the US.

In the last week, lumber has traded limit down ($10) several times and has decisively broken out on the downside.  There are at least two important things to consider as lumber prices fall:

1) A drop in lumber prices opens the door to lower inflation expectations and, in turn, lower bond yields.  Lumber is indicating that there was more than just weather negatively impacting the economy this winter.


2) Stimulating and restoring the housing market has been a huge focus for the Fed.  Policies like QE were directly aimed at improving housing activity, the wealth effect and confidence.  To the extent lumber prices suggest weakening housing activity, and by extension faltering success of extraordinary monetary policy, this could negatively impact the perception that QE is helping the economy.  The stock market seems to reflect a confidence reflationary central bank policies have put the economy on the road to recovery.  Should that confidence get shaken, stocks are at risk.  This likely explains the near 80% correlation between lumber prices and stock prices over the last four years.  Should that relationship continue, it bodes ill for stocks.


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