- Strength in economically sensitive industries is bullish for the broader market -
Lumber has some good news for stocks: Lumber futures are up almost 40% since the end of May.
That’s bullish for the U.S. stock market because lumber appears to be even more sensitive than the market itself to expected changes in the economy. Lumber’s big increase since the beginning of the summer suggests that a stronger economy is likely in coming months, which in turn should show up in higher stock prices.
You might object that this big increase is nothing more than a reflection of the massive reconstruction projects that are only beginning to get underway in hurricane-ravaged Houston and Puerto Rico. But it’s worth noting that, by late August — before the first of those hurricanes hit — lumber futures were already 10% above their end-of-May level.
To be sure, the U.S. lumber market in recent months also may have risen in anticipation of President Donald Trump’s decision this week to impose tariffs on Canadian soft lumber. But it’s not immediately clear how that decision will impact world lumber prices, and in any case the MSCI Global Lumber Index closed barely changed on the day of the tariff announcement.
How should you go about using lumber prices as an indicator? Some advisers, such as Tom McLellan of the McClellan Market Report, focus on the very short term. McClellan, for example, says that lumber futures lead the stock market with a one-week lag. He credits lumber’s strength in recent sessions for one of the reasons he recently turned bullish on the stock market’s near-term trend.
Other advisers focus on somewhat longer periods. One study published by Pension Partners recommended looking at the 13-week rate of change, with an additional twist added in: comparing lumber’s gain or loss to that of gold. The rationale is that lumber typically outperforms gold when conditions are most bullish for equities, and underperforms when it’s best to lighten up. This alternate way of focusing on lumber also reaches a bullish conclusion: The Guggenheim MSCI Global Timber ETF has gained 10% over the past 13 weeks, versus 1.2% for gold bullion. (See chart below.)
By the way, the idea of comparing an economically sensitive commodity to gold is not new. Last July I devoted a column to the ratio of platinum to gold. The message of that ratio then was bullish, and the Dow Industrials today are close to 10% higher.
Fortunately for stock market bulls, the platinum-to-gold ratio is even more bullish now than it was in July. Our confidence in this bullish conclusion increases because these two separate ratios, lumber-to-gold and platinum-to-gold, are telling the same story.
As always, bear in mind that no indicator is foolproof. Nevertheless, it’s encouraging that there is a genuine economic case to be made for higher stock price as opposed to nothing more than a fear of missing out.