It’s Time for a Commodities Trim

It was a very big week for markets, a week that included a Fed rate hike, a recessionary Gross Domestic Product (GDP) print and some of the world’s biggest companies reporting Q2 results.

There were strong earnings reports from bellwethers such as Apple (AAPL) and Amazon.com (AMZN), two companies that consistently get my personal patronage. Then there were some big earnings misses from the likes of Meta Platforms (META) and Intel (INTC), also two companies that have received my patronage.

In between these mixed reports we had the Federal Reserve hike interest rates another 75 basis points.

In the Federal Open Market Committee (FOMC) statement, the Fed did note some signs of softening in the economy with the first sentence of the statement reading: “Recent indicators of spending and production have softened.” That could quite possibly set the stage for a less-hawkish tilt in the coming months.

The observation of mild weakness in economic growth was offset by the still-strong labor market. But the bottom line is that inflation is still much, much too high for concerns about economic growth to cause the Fed to get less hawkish at this point, especially with unemployment still well below 4%.

Speaking of economic growth, or lack thereof, this week we got the first look at the GDP numbers for the second quarter. And as you likely know, it was the second consecutive quarter of negative GDP growth (-0.9%).

Technically, two consecutive declines in GDP does not, by itself, constitute a recession. That determination, at least officially, can only be made in hindsight by the National Bureau of Economic Research (NBER). The NBER uses GDP numbers, but NBER’s staff also looks at various demand metrics and employment indicators among other things to make that call.

This week’s GDP report did show a further loss of economic momentum in Q2, but several important components of the report continue to show solid demand and mostly positive, but notably slowing growth, and not an economy in outright contraction. To that point, consumer spending rose 1.0% in Q2, down from 1.8% in Q1 and the slowest pace since 2020 in the depths of the pandemic. But importantly, it was still a positive reading.

So, what was the market’s reaction to all of this?

Well, the major averages spiked higher on what was a combination of what I’ve been calling “peak Fed hawkishness and peak inflation.” The idea that the Fed is getting closer to an endgame when it comes to rate hikes, and even a potential series of rate cuts as soon as 2023, prompted bulls to get back in. And the better-than-expected reports from bellwethers, despite the few big misses, has served to bolster the notion that corporate conditions are good enough to own right here, right now.

Now, given the current market conditions, there is one segment of the market that I think is due from some big profit taking.

That segment is commodities, and particularly our position in the Invesco Optimum Yield Div. Commodity Strategy No K-1 ETF (PDBC).

Recall that last year (May 2021) we bought PDBC in the Tactical Trends Portfolio. At that time, I told you that getting long in commodities and natural resources in the first half of 2022 was likely a good play because we were in a high and rising inflation environment combined with strong economic growth. The bullish call on commodities came long before Russia invaded Ukraine, but that event supercharged what was already a well-founded rally.

Now, however, we are likely transitioning to an environment of peaking and declining inflationary pressures and slowing growth. Historically, that has not been a good environment for commodities and natural resource companies and that’s the impetus for today’s portfolio action.

So, as soon as you receive this email, please take the following action:

Sell the Invesco Optimum Yield Div. Commodity Strategy No K-1 ETF (PDBC), at market, which last traded for $17.94.

As of this writing, our total return in this position (which includes a big, $7.15 special dividend last year), is a whopping gain of 108.48%.

Finally, this week’s bullish price action in the broad market pushed the S&P 500 up about 3.5%. And while that’s a welcome move, remember that year to date we remain down by about 13.9% on the benchmark index.

Still, historically speaking, markets have staged a nice rebound in the second half of the year every time they’ve sold off more than 15% in the first half of the year. And if we go by the results so far in July, where the S&P 500 is up 8.5% so far, the market certainly appears to be embracing that history.

Okay, now bank that huge gain in PDBC, and let’s continue to enjoy this latest bull run in equities.