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Investing Specialists

Don't See Dark Clouds in Falling Commodity Prices

Though markets dropped as commodities swooned, the recent plunge in commodity prices portends better news on the inflation front, says Morningstar's Bob Johnson.

Last week saw a sell-off in commodities that took some of the sting out of this week's announcement of April's inflation data. This week, agricultural commodities took another downward move as government crop reports indicated increased production of key crops including corn and wheat.

One might hope that falling commodity prices, one of the real thorns in the side of the economic recovery, might be viewed positively by Wall Street. Instead, stock markets sold off this week and bond yields declined as investors feared that falling commodity prices were indicative of a weaker economy. However, I believe accelerating employment growth and slowing inflation (due at least partially to increasing supply of key commodities) seem to be more indicative of improving economic growth in the quarters ahead, not a decline.

The End of QE2 Could Bring Down Both Commodities and Stock Markets
I also suspect that both stock market assets and commodities that seemed to benefit so much from QE2 (quantitative easing part II, the Fed's bond repurchase program meant to reduce long-term interest rates resulting in higher asset prices and a falling dollar) are beginning to anticipate the end of the program in June. Perversely, long-term rates have been falling for some time even as QE2 comes to an end. A fear that the economy might slow as the program comes to an end (and no new program is proposed) is the primary reason for the rate decline, in my opinion. I continue to believe fears of a declining economy are misplaced as consumers continue to spend, at least according to the weekly shopping center data, and that's with gasoline prices just beginning to edge downward.