The Effect of Commodities on Expectations

March 18, 2022
By Tim Courtney, Chief Investment Officer

For the first time since March of 2020, we have officially experienced a market correction — defined as a 10 to 20% drop in stock prices.1 A good amount of this correction is due to the current wave of geopolitical risk.

This risk is also increasing volatility within other asset classes such as commodities. From 2001- 2020, inflation remained tame at about 2%, and commodities, despite being an essential part of life and survival, were slightly negative.2 However, healthy demand, broken supply chains and a war have caused prices to surge.

The increases are coming from multiple segments within a commodity basket: energy, agriculture and base metals.

  • Oil: Last week oil reached $130 per barrel, a 13-year high. Although prices dropped quickly, it remains near $100 per barrel.3 Oil prices filter into everything from travel to shipped goods. Consequently, companies are confidently raising the price on millions of products.
  • Wheat: Ukraine has been called the breadbasket of Europe and combined with Russia, accounts for 29% of the global wheat market.4 Between Ukraine’s ban on exporting goods, including wheat, and the sanctions against Russia, there is a significant gap in wheat production and as a result, prices recently hit a 14-year-high.5
  • Base metals: We are seeing record price hikes when it comes to metals including nickel, aluminum and copper. Russia is the third-largest producer of nickel and provides 6% of the world’s aluminum.6 These base metals are crucial across manufacturing, particularly in the automobile industry. For example, Nickel is a key component of lithium-ion batteries which are used in electric vehicles. Analysts say recent price increases could raise the cost of an electrical vehicle by $1,000 or more.7

These elevated commodity prices will start to seep into the cost of everyday products and services, and some companies are expected to see a dip in profitability during Q1 and Q2. If the current pace continues, higher and higher prices will start to increase the chances of a recession as demand starts to fall off. Although consumer confidence surveys have been falling due to the high rate of inflation, spending has continued at healthy levels so far. And for the full year, corporate profit estimates are holding steady and, in some cases, rising.

Further, U.S. households still are in a fairly good position, having refinanced debt at very low rates and holding high value homes and higher stock portfolios. While much of the pent up demand for goods may have been filled, households could begin spending on services and travel more than they have over the last two years. So while we expect to see increased volatility in the near term, we still expect markets to eventually reflect some of the economic strength that has carried over into 2022. Inflation will be a wild card for the next several quarters.


  1. Yahoo! Finance (3/10//22) — Is the stock market correction over?
  2. DFA Returns (data as of 12/31/2020) — Bloomberg commodity index and consumer price index
  3. com (3/9/22) — Oil drops 12% for worst day since November as wild ride triggered by Russia disruption continues
  4. com (2/23/22) — Impact of Russia-Ukraine on supply chains: food, metals, commodities
  5. com (3/1/22) — Wheat futures are soaring. Food prices could be next
  6. com (3/7/22) — Oil, wheat, nickel storm higher on fears of supply chaos
  7. com (3/8/22) — Nickel’s price surge could threaten automakers’ electric vehicle plans

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