Why Commodities Are Sending the Stock Market Mixed Signals

The Dow climbed a bit Thursday morning, but commodity markets are wreaking havoc on investor sentiment. Find out why here.

Mar 27, 2014 at 11:00AM
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Early Thursday, the Dow Jones Industrials (DJINDICES:^DJI) managed to claw back some of the ground it lost yesterday, with the average rising 17 points as of 10:45 a.m. EDT. Mixed economic data set the stage for a choppy morning for the market, with new claims for unemployment benefits falling to their lowest levels of the year, but a 0.8% drop in pending home sales contracts in February offseting some of the enthusiasm. From a longer-term perspective, though, the Dow Jones Industrials haven't yet demonstrated their ability to break out to new highs, and investors are looking to other markets for clues on where the Dow and the broader stock market could go next. One of those markets is commodities, with a direct impact on oil giants ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) as well as heavy-equipment maker Caterpillar (NYSE:CAT).

What oil's moves mean
On the energy front, oil prices have responded somewhat favorably to the geopolitical crisis in Ukraine, with the prospect of economic sanctions against major oil and gas producer Russia having an impact on the overall market. Today, near-term domestic crude-oil futures jumped more than $1.25 per barrel to $101.50, helping to push both Exxon and Chevron higher on the session.

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Source: Wikimedia Commons.

Yet commodities-market participants remain skeptical about energy's ability to sustain these gains. When you look further into the future, investors expect oil prices to return to lower levels, with projections for $80 oil by the end of 2018 according to the futures markets. The prospects for natural gas aren't nearly as bad, but after its recent spike to around $6, nat-gas has fallen back to the $4.50 range, and prices are seen staying between $4 and $5.50 for the next decade. Those projections limit the upside for Exxon, Chevron, and other companies with well-established reserves, even though they're high enough to produce growth for start-ups and other players seeking to expand in the coming years.

False start?
Meanwhile, for mined commodities, the future is even more uncertain. Copper has climbed back above the $3 per pound level after plunging on concerns that China's budding financial crisis could spur collateral-related sales of the base metal. Yet even with the rebound, copper remains more than 10% below the levels where it started the year. For precious metals investors, a recent drop in gold and silver prices has thrown cold water on what appeared to be a solid rally to begin 2014.

Caterpillar benefits from rising construction activity in a stronger economy, but it also needs the commodities markets to cooperate in order to further its sales of mining equipment. Without miners being able to make capital expenditures, Caterpillar will have a tough time boosting its own growth.

For the Dow to rise to new records, commodities markets will play a key role. If a rebound in commodities leads to faster growth in related sectors of the economy, it could provide exactly the catalyst investors need to send the Dow to new heights.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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