Equities analysts see stronger economy and inflation ahead
By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- As the rising price of commodities helped bolster the U.S. stock market Tuesday, investors found a mixed message in surging gold and crude.
"The stock market is fine, as long as the economy and earnings hold up. The challenge will be rising inflation and interest rates," said Hugh Johnson, chairman of Johnson Illington Advisors.
"Everything we saw last week pointed to a stronger economy with higher inflation," said Johnson of recent economic data, including a survey by the Institute for Supply Management released last Thursday, which found prices paid by purchasing managers climbed to 63.1% in August from 41.3% the month before.
On Tuesday, energy and materials companies led broad market gains as the major U.S. indexes extended their advance to a third session.
The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 9,497, +56.15, +0.60%) gained 56.07 points, or 0.6%, to end at 9,497.34, while the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,025, +8.99, +0.88%) added 8.99 points, or 0.9%, to 1,025.39 and the Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,038, +18.99, +0.94%) rose 18.99 points, or 0.9%, to 2,037.77. More data: Market Overview.
While gold bugs point to inflation as being behind the precious metal's climb, gold ETF money flows suggest otherwise, said Jack Ablin, chief investment officer at Harris Private Bank.
"The ratio of bullish ETFs to bearish ETFs in gold has explained a better part of the commodity's movement since their introduction in 2007. Inflation-protected Treasury securities, or TIPs, offer a better indication of inflation expectations. The five-year TIP security currently implies a meager 1.4% annual CPI for the next five years," wrote Ablin in a Tuesday note. "Given the disparity, I'm inclined to side with the Treasury market." See Bond Report.
Hopes for an economic recovery are supportive of both equities and the price of crude, which advanced $3.08, or 4.5%, to $71.10 a barrel. Read Futures Movers.
Should oil shoot higher for some reason other than the economy, the rise is no longer bullish for equities, said David Kelly, chief market strategist at J.P. Morgan Funds.
In the third quarter of 2008, 3.5% of GDP was devoted solely to buying foreign oil -- "a significant tax on the U.S. economy," Kelly said.
Conversely, speculation about higher inflation on the horizon fueled buying in gold as well as in shares of basic-materials companies but brought a bearish tint to the broad stock market.
On the New York Mercantile Exchange, gold futures on Tuesday climbed to an 18-month high of $1,006.90 an ounce but ended beneath the quadruple-digit threshold at $997.90. See Metals Stocks.
Dan Greenhaus, chief economic strategist at Miller Tabak & Co., called gold's spike above $1,000 an ounce and crude's surge above $71 a barrel "symptoms" of the greenback's decline to its lowest level since the fall of 2008.
"As the dollar moves lower and expectations continue to look for even further weakness, upward pressure on various commodities including gold and oil will be the order of the day," said Greenhaus.
Trading in both crude and gold futures is denominated in U.S. dollars.
"Gold is a completely speculative play. It's only worth what someone else is willing to pay for it," said Kelly.
"Oil is being used more and more as a speculative football, as there is no supply imbalance now [to drive prices up] -- part of it is people are getting in as an investment," he said.
Kate Gibson is a reporter for MarketWatch, based in New York.