Wednesday, December 7, 2011

S&P 500 and Industrial Commodity Prices

One of the best ways to assess whether the global economy is progressing and regressing on a real-time basis is to track the CRB raw industrials spot price index. It includes the prices of 13 industrial commodities. I like it because it excludes petroleum and lumber products, which have their own unique supply and demand fundamentals. The index is highly correlated with global industrial production and global exports. (See Figures 1 and 2 in our High Frequency Economic Indicators.)

The CRB index is also highly correlated with the overall S&P 500, especially with its Transportation index. Indeed, this commodity price index is one of the three components of our Fundamental Stock Market Indicator (FSMI), which has an especially tight fit with the S&P 500 (Figure 55). The message from these sensitive indicators is that the global economy remains relatively weak:

(1) As of yesterday, the CRB raw industrials spot price index (1967 = 100) was 527.4, down 17.3% from its record high of 638.1 on April 12. However, it remains just above its previous cyclical peak of 525.7 on May 13, 2008, and 66.7% above its previous cyclical low of 316.3 on December 5, 2008.

(2) Our Boom Bust Barometer (BBB)--which is the ratio of the CRB index to the four-week moving average of initial unemployment claims--was 133.9 at the end of November, which is 16.1% below the most recent cyclical peak of 159.6 on March 12, 2011 and 14.4% below the prior cyclical peak on August 11, 2007 (Figure 54).

(3) Our FSMI--which averages our BBB and Bloomberg’s weekly Consumer Comfort Index--edged down at the end of November to 91.9. It is 15.5% below its most recent cyclical peak on February 26, 2011. It suggests that the S&P 500 should be trading between 1150 and 1200 (Figure 55).

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