Will Booming Stocks Crush These Investments?

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Stock investors have been happy to see the stock market reach new multiyear highs this week. But behind the scenes, big changes are happening in other markets that most mainstream investors don't follow as closely. These changes could have a big impact not only within those markets but also on others as well.

When money moves
Tuesday's big jump in stocks came as a number of long-term problems appear to be getting closer to resolution. Although experts disagree about whether the Greek debt deal will be a lasting solution or merely buys time before a potentially larger crisis hits, getting the formal haircut on Greek bonds done marks a milestone on the path toward getting Europe's broader problems under control.

Similarly, on the U.S. economic front, few would say that unemployment and economic growth are at desirable levels. But compared to the worst of the recession, it's increasingly clear that we're making progress. Valuations on stocks have started to reflect this.

But whenever stocks rise, it makes sense to ask where the money that's flowing into them came from. In this case, you can find two obvious sources of funds: bonds and commodities.

Higher rates, finally?
Bond bears have looked for higher rates for years without success. But yesterday, the bond market delivered a big blow to those who think low rates will last well into the future. Prices on 30-year Treasuries fell three points -- a massive move for the market -- sending the yield on 10-year Treasuries soaring nearly 20 basis points to their highest level in five months. Those betting against bonds have cashed in, with the ProShares UltraShort Treasury 20+ Year ETF (NYS: TBT) now up more than 10% so far in March.

Higher rates could spell relief for long-ailing savers, but it could also force a clampdown on increasing debt levels. After a long drop, consumer credit has started to expand again, giving a big boost to the retail sector in particular. That boost could reverse itself if credit gets tighter.

All that glitters
Meanwhile, investors who assumed that commodities would rise along with stocks have been sorely disappointed this week. SPDR Gold Trust (NYS: GLD) has now dropped 8% since its late-February highs, while iShares Silver Trust (NYS: SLV) is down even further, with nearly a 13% downward move. As you'd expect, Central Fund of Canada (ASE: CEF) and its mix of gold and silver has basically split the difference, falling 10%.

Some attribute the drop in precious metals to the Fed's failure to step in with additional quantitative easing. That sentiment would also explain the rise in bond yields, as the Fed has used Treasuries extensively to keep long-term rates low.

Putting it together
More importantly, higher rates make investments in commodities that don't produce income less attractive. The opportunity cost of holding gold and silver goes up when rates are higher. For years, the market has benefited from near-zero rates, but if that trend reverses, investors might choose to flee the metals. Yet SPDR Gold hasn't yet reported a drop in the volume of gold it holds, and iShares Silver has seen only a very slight decline in its silver tonnage.

Moreover, other commodities haven't responded as violently. Soybeans have jumped 10% this year and are at six-month highs, while corn remains near its highest levels of 2012. That's a big reason why nitrogen fertilizer company CF Industries (NYS: CF) has performed well, as the nitrogen fertilizers it produces are especially useful for corn production. CF should continue to thrive as long as corn prices stay relatively high.

Keep your eyes open
So far, it's premature to say that a rising stock market will crush bonds and commodities. Those markets have their own dynamics, and stocks alone won't be the deciding factor in what happens to them.

The main point, though, is this: Even if you only invest in stocks, you need to pay some attention to other markets. Nowadays, pretty much all markets are related, and what happens in one can have a profound impact on the others.

Within a reasonable asset allocation strategy, the right stocks can help you get the returns you need. Be sure to check out The Motley Fool's latest special report on retirement, which highlights three promising stock picks for retirement investors. Don't wait -- get your free report today while it's still available.

At the time this article was published Fool contributor Dan Caplinger enjoys the boom as long as he can. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services have recommended writing puts on ProShares UltraShort 20+ Year Treasury. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy crushes the competition.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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