The price of lumber has crashed recently, with gold posting gains. Does trouble loom for the stock market.
Lumber has been out of favor and gold has been in. The price of lumber is down 42% from a decade-plus high hit on May 7. Since that date, gold has continued gaining, up 1.6%. The lumber to gold ratio—the price of lumber divided by that of gold—has fallen hard as well. That ratio is down from 0.9 earlier this year to 0.5, according to SentimenTrader data. This means investors have been finding more value in gold—a defensive, less economically sensitive commodity—relative to the highly cyclical lumber, a sign that they are taking less risk, not more.
That could signal a drop ahead for the stock market. In 2018, the ratio fell from just under 0.5 to just under 0.3. Shortly after that slide began, the S&P 500 fell roughly 18%. That was the last meaningful crash, prior to this year’s tumble, in lumber’s relative appeal. “The last time the ratio crashed, it preceded trouble in the S&P,” writes Jason Goepfert of SentimenTrader.
But that’s not always the case. Historical data from SentimenTrader going back to 1989 show that after the lumber to gold ratio falls from a 3-year high to a 50-day low, S&P 500 returns for the following 6- and 12-month periods are positive 70% and 90% of the time, respectively, though lumber’s decline did precede the 1990 recession. But on many occasions, when the ratio falls by that magnitude, “It was not a good reason to sell stocks,” Goepfert says. Even in 2018, the S&P 500 was up 5.7% 12 months after the signal, though it had dropped 6.4% six months later.
The signal was negative for lumber prices, which continued to fall, on average, over the next three months.
For now, though, it’s just something to cast a wary eye on, then sit tight.
Write to Jacob Sonenshine at firstname.lastname@example.org