By Nick Godt
A DOW JONES COLUMN
Even as the market continues its advance this year, one big
question has been looming in investors' minds: Will surging
commodity prices eventually hit U.S. and global consumption?
Not taking any chances, or perhaps reacting to less upbeat
consumer surveys, as well as lower profits and price hikes from the
likes of ConAgra Inc. (CAG) back in December, the market has
already made adjustments so far this year.
The S&P 500's consumer-discretionary sector led the market's
rally for the past 12 months with a 26% gain, but it's among the
laggards so far this year--up only 0.8%, making it the
fourth-worst-performing sector of the broad index.
Consumer staples is the third-worst sector, up 0.1%, after
rising 10% over the past 12 months.
Not surprisingly, energy, up 2.7%, is the second-best performer
on the S&P.
It's not only hard commodities such as crude oil and copper, but
also soft commodities such as grains and cotton that are on the
rise.
"It's an issue," said Owen Fitzpatrick, market strategist at
Deutsche Bank. "There are various industries that can pass through
costs and others that have to deal with a more competitive
environment and find it hard to pass that along."
He expects retailers and restaurant chains to face the most
pressure within the consumer-discretionary sector, while hotels,
travel and automotive stocks should come out better.
After posting big gains last year, stocks like J.C. Penney Co.
Inc (JCP), Macy's Inc. (M), Target Corp. (TGT), Limited Brands Inc.
(LTD), Family Dollar Stores Inc. (FDO) and Abercrombie & Fitch
Co. (ANF) have slumped in January, weighing on the
consumer-discretionary sector.
At Gluskin Sheff, chief market strategist David Rosenberg notes
that this is only the fifth time in modern history that both energy
and food prices have risen at a double-digit annual rate. And in
those other years-- 1979, 1980, 1996 and
2008--consumer-discretionary stocks were not the place to be.
A broader question remains: How will U.S. and global consumers
react should the trend continue?
Rosenberg estimates that rising energy and food prices, along
with the end of debt-service relief, will create headwinds of $200
billion that could offset the boost from U.S. fiscal stimulus
measures recently announced.
Meanwhile, outside of the U.S., and especially in emerging
markets, rising commodity prices are felt much more acutely and
tend to lead to social unrest.
It wasn't only a slump in the Dhaka stock market, but also
rising food prices, that led to big protests in Bangladesh just a
few weeks back.
China, with its huge appetite in commodities itself a large
reason for the surge in prices, is keenly tuned to both signs of
social unrest and inflation--and it has been taking measures to
slow its economy.
That partly explains why the market went down on Thursday, after
stronger-than-expected growth from China led to concerns Beijing
might hit the brakes even more, impacting global growth and demand
for commodities and their related stocks.
While not enough to halt the U.S. stock market in its tracks so
far this year, commodities prices do promise to become an
increasingly prominent theme for investors this year.
(Nick Godt is a writer for MarketWatch. He can be reached at
415-439-6400 or via email at AskNewswires@dowjones.com.)