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Will This Little-Watched Commodity Bring Down the Stock Market?

By Dan Caplinger - May 3, 2021 at 6:16PM

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It's good for producers, but consumers could end up paying a whole lot more for what they want.

The stock market was mixed on Monday, with different parts of the market reacting in varying ways to prevailing trends on Wall Street. The Dow Jones Industrial Average (^DJI 0.47%) saw substantial gains, and the S&P 500 (^GSPC 0.40%) managed to post a more modest advance. However, the Nasdaq Composite (^IXIC -0.06%) gave up ground.

Many stock investors don't pay much attention to what's happening in commodities markets. However, in some cases, key commodities can have a big impact on the entire economy. That's potentially the case for lumber, which hit record levels on Monday and shows few signs of giving up ground anytime soon.

Tall trees as seen from the ground looking up

Image source: Getty Images.

How the market did on Monday

Market participants continued to take advantage of the reopening trade on Monday, bidding up shares of stocks that stand to benefit the most from a return to more normal conditions. However, they sold off some of the tech giants that proved to be more resilient over the past year. None of the moves were all that extreme, though, and indexes remained near record levels.

Index

Percentage Change

Point Change

Dow

+0.70%

+238

S&P 500

+0.27%

+11

Nasdaq Composite

(0.48%)

(68)

Data source: Yahoo! Finance.

A gold rush in wood products

The lumber industry doesn't get a whole lot of attention most of the time. The business model is pretty simple -- grow trees until they're mature, harvest them, and then cut them down into various basic materials, including wood products for construction and other commercial and consumer purposes.

Lately, however, high demand for lumber has put the commodity into the spotlight. Lumber futures prices hit record levels on Monday, with the May contract rising to $1,589 per thousand board feet. To put that in context, the same futures contract traded for just $410 per thousand board feet as recently as last October, and prices were below $300 just over a year ago.

The move is a matter of supply and demand. On one hand, as economies reopen around the world, many once-delayed construction projects are finally moving forward. Many of those who stayed at home during the pandemic have plotted out do-it-yourself projects for home enhancements like additions or decks, boosting lumber demand as well.

Meanwhile, shutdowns in the timber and lumber production industries have constrained supplies. Moreover, trade tensions with key partners like Canada have led to higher duties on lumber, leading to fewer Canadian lumber imports.

What impact will expensive lumber have?

For investors looking at companies in the wood products industry, high lumber prices are good news. Weyerhaeuser (WY 1.37%), Louisiana-Pacific (LPX 5.15%), and Rayonier (RYN 1.87%) were all up between 1% and 2% on Monday. And their shares have generally pressed higher over the past several months, as higher lumber prices have boosted their prospects for outsized profits in the short run.

By contrast, those looking to build or remodel their homes could face higher costs. Low mortgage and home-equity loan rates are making it easier for homeowners to finance purchases and work without necessarily boosting their monthly payments all that much. However, at some point, the Federal Reserve is likely to respond to inflationary pressures by boosting interest rates -- and that would suddenly slam the door on cheap home financing at a critical time.

Much of the stock market's gain has hinged on inflation being under control and rates being low. If high lumber prices endanger that, it could bring down the entire bull market.

You don't have to trade in the commodities markets for them to be relevant to your stock investing. Every investor should keep tabs on other financial markets, with an eye toward finding links and potentially discovering lucrative stock-investing opportunities.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Weyerhaeuser Co. Stock Quote
Weyerhaeuser Co.
WY
$36.58 (1.37%) $0.49
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,467.73 (0.47%) $158.22
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,226.90 (0.40%) $16.66
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$12,847.70 (-0.06%) $-7.11
Louisiana-Pacific Corporation Stock Quote
Louisiana-Pacific Corporation
LPX
$60.43 (5.15%) $2.96
Rayonier Inc. Stock Quote
Rayonier Inc.
RYN
$37.64 (1.87%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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