Will a US Stock Market Crash Kill the Commodity Boom?

There’s a growing sense that the US bull market is entering its twilight years.

Of course, nobody can pick the exact day and time that adjustment arrives. But it’s hard not to fathom that we’re approaching a top in this history-breaking run.

So with that in mind, here’s the question I keep coming back to…

If the tech giants driving this market finally crack, does that take commodities down with them?

Well, the easy answer is absolutely!

You see, most commodities are tied to global growth, and US tech has been the engine driving markets for over a decade. One is supposedly bound to the other.

And I can’t disagree with that argument. Every serious sell-off triggers an initial flight to safety, usually into long-duration government bonds and safety net currencies like the US Dollar.

But it’s what happens AFTER that interests me…

The Question I Am Testing

Does a US stock market crash (when it finally lands) mark the end of the upward turning of the commodity cycle?

In other words, when equities break, do commodities break permanently alongside them?

One way we could find the answer is to look at the 1970s playbook: the era of inflation shocks, oil shocks and elevated commodity prices.

While many readers will be familiar with the idea that the 1970s were good for commodities overall. Few have looked at what happened during the actual crash phase of that era and what it meant for different asset classes.

So let’s unpack that period into its three distinct phases:

Part One: The Nifty Fifty Boom

Between 1968 and 1973, a group of roughly 50 large-cap growth stocks dominated the US market. They were nicknamed the Nifty Fifty.

Investors treated them as one decision stocks. Buy them once, hold forever, and the returns would take care of themselves.

Sound familiar? Today’s Magnificent Seven tech names have a rather similar flavour. Buy the dip, hold on, and let the portfolio compound.

But then this happens…

Part Two: The Crash

Between 1973 and 1975, the S&P 500 fell close to 48%.

The trigger was the 1973 oil crisis, made worse by the collapse of the Bretton Woods system and runaway inflation.

That combination shattered the idea that these stocks were unstoppable. At the time, it was described as one of the worst market events since the Great Depression.

Which leads us into the final phase of the 1970s:

Chapter Three: A Grinding Recovery

From 1976 to 1980, stagflation set in. Stagnant growth and rising prices squeezed investors from both sides.

Many assets posted decent gains in nominal terms but lost value when adjusted for inflation.

Shifting back to today

Now, I plan to unpack each of these chapters in far more detail over the coming editions. But first some context…

Right now, we have not seen major stress in the US market. If anything, we’re still living inside our own version of the Nifty Fifty boom. US markets are only a few percentage points from their all-time highs.

But cracks are forming. Like here in Australia, real estate prices are softening across numerous US states. A useful leading indicator of a system under stress.

Meanwhile, we’re facing a familiar 1970s-style oil shock, with the ongoing disruption around the Strait of Hormuz.

Back in 1973, OPEC members whacked an embargo on oil exports to the West. Interestingly, the S&P 500 never made a new high from that point before the crash set in.

Which is perhaps one key difference to today’s market… Despite the Hormuz oil crisis, the S&P 500 has continued to make new all-time highs. 

Oil shocks be damned!

But the bigger question remains. When that US market correction does finally arrive, what happens to commodity markets?

In my next edition, I’m going to walk you through exactly what gold, copper and oil did during those severe crash years, and the period that followed. The answers might surprise you.

Until next time.