Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

What can we learn when the grocery bill goes up

Dean Christians
2021-05-27
A proxy for food prices surged to the 5th highest level since 1901. Let's review the outlook for stocks.

I've seen several references to the year-over-year change in the UN Food and Agriculture World Food Price Index of late. The 12-month rate of change recently crossed above 30%, a level not seen since 2011.

Let's look at the stock market outlook when food prices reach lofty levels like today.

HISTORICAL CHART

Once food prices reach lofty levels like today, they don't stay there for long. However, as an investor, we want to know if a surge in food prices can provide us with an information edge in the stock market.

Unfortunately, the world food price index does not have a long history. Let's create a proxy for food prices by combining corn, wheat, and soybeans and measuring the average 252-day rate of change for the group.

FOOD PRICE MOMENTUM CHART

The recent surge in momentum reached the 5th highest level in history on 5/7/21. 

Now that we have more historical data for food prices, let's see what happens to stock prices when the combined average surges above 80%.

HOW THE SIGNALS PERFORMED

Performance looks weak across all timeframes. If one is looking for a historical analog, I suspect the 1933 and 2011 signals might be best as they both occurred after the initial surge from a bear market/recession period. 

Let's take a look at annualized returns for the combined food proxy momentum indicator. 

ANNUALIZED RETURNS SINCE 1927 - COMBINED AVERAGE LEVELS

The table highlights how sectors and factors encounter a more challenging environment when the combined average increases above 80%. Traditionally defensive and commodity-based sectors do better while more growth-oriented ones like discretionary and technology struggle. 

Interestingly, we've seen that performance trend of late.

I would note that while rare, stocks do not like either end of the inflation or deflation spectrum.

ANNUALIZED RETURNS SINCE 1990 - WORLD FOOD PRICE INDEX LEVELS

The following table provides annualized returns since 1990 using the world food price index with a bracket level of +30% to -30% to reflect the current environment. The +30% performance trends look similar even with less history. However, the -30% or worse y/y level for food prices occurred at a point in time that marked the bottom of the stock market in 2009, hence the strong annualized returns. 

Please keep in mind that the sample size is small, and the 2007-08 bear market and 2009 recovery period influenced returns in a meaningful way.

I suspect the stock market remains in a trading range until we see some relief from high commodity prices of all types.

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.