• Historically, I've thought the cattle markets and US stock indexes had a strong correlation. I was incorrect. 

• Reworking my studies, I find a weak connection at best over a variety of time frames. 

• That being said, live cattle shouldn't move to a long-term downtrend until real fundamentals of the market change. 

If you happened to catch my Wednesday piece talking about the conflicting signals in US cattle supply and demand before I did a quick re-edit, you might’ve noticed I took out the part discussing the correlation between live cattle (LEM25) and S&P 500 futures (ESM25). Having watched these markets for decades, in my mind I thought there was a strong correlation between the two. Therefore, when I pulled up one of our in-house studies^[i]and saw a 77% correlation over the past 10 years, I thought my eyeball test was confirmed. I was incorrect. 

There was a glitch in my computations. My son quickly alerted me to the situation, so I went back to the piece and pulled the paragraph in question out. The glitch was fixed and the matrix rerun (the study, not the movie series), and lo and behold the eyeball test was incorrect. While there was some connection between the two markets, it was largely insignificant over the 5 timeframes studied: 

• 1 year ~ 16%
• 2 years ~ 19%
• 3 years ~ 17%
• 5 years ~ 14%
• 10 years ~ 26%

I don’t mind being proven wrong, even after all these decades as an analyst. As the late, great theoretical physicist said, “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.”

What was my theory? While I disagree with the US president’s belief that the stock market equals the economy (one of many things on which I disagree with him), I did believe that if the US stock market was bullish then the cattle markets, in all the various forms, would be bullish as well. And if one of those iterations of the cattle markets in particular was bullish– boxed beef – then it would indicate US consumer demand was still strong and the economy was still chugging along. Sticking with the theme of questionable eyeball tests, this theory also comes with an asterisk given daily US boxed beef prices are reported by USDA. 

For the record, boxed beef markets were higher Wednesday afternoon with high-end choice cuts jumping $3.57 to a price of $365.42. This was up roughly $20 from the end of April’s reported price of $345.31 at a time when there continues to be a great deal of hand wringing and gnashing of teeth about other economic indicators telling us the economy is collapsing. It could well be. Again, many in the US cattle industry scoff at the idea of using boxed beef reports for anything other than toilet paper. So, we’ll see what happen. 

This past Tuesday in my piece asking if US cattle were screwed (based on the false report of New World screwworms being found deep in the US heartland), I applied a number of my market rules to live cattle. I needed to carry the discussion one step further, to the final Rule #7: Stock markets go up over time. This is just a fact of life. Stock markets are now subject to the idea of supply and demand, at least not in total, and increased investment money will eventually pull stock markets higher. 

This is not the case in cattle, or any other production commodity that comes to mind. The economic Law of Supply and Demand^[ii] holds court, as stated in Rule #6: Fundamentals win in the end. Given this, the various cattle markets can move up and down with ongoing long-term uptrend similar in appearance, but much more dramatic, to what occurred between December 2009 and November 2014. The current move began with the 2-month bullish reversal back in April and May 2020. 

At some point the cattle markets will break, but as previously discussed it will have to start with a change in real fundamentals (cash markets, basis, futures spreads). What we now know is this doesn’t necessarily mean US stock markets are set to fall. Oddly enough, the three major US stock indexes (S&P 500 ($INX), Dow Jones Industrial Average ($DOWI), Nasdaq ($NASX)) all confirmed major (long-term) downtrends this past March.

Fun times indeed. 
 

^[i] Using weekly closes only of the nearby futures contract, with the roll based on open interest. 

^[ii] Law of Supply and Demand: Market Price is the point where quantity demanded equals quantities available creating a market equilibrium.