Intermarket Outlook

As of 05/23/2022

The current economic environment in the US appears to be weakly deflationary. The outlook for US stocks is bearish. Commodities are neutral. Bonds are bearish.

Detailed asset class performance breakdowns can be viewed here. High-level intermarket trends are examined more closely below.

The Dollar, Commodities and Bonds

The US dollar’s outlook has been bullish since September, 2021 (chart). A rising dollar is deflationary and points to lower commodity prices.

Gold prices (chart) are falling but oil prices (chart) are rising, casting some doubt on the deflationary implications of the dollar’s trend.

Base metal prices are declining relative to bond prices (chart). The ratio of base metals to bonds generally declines when economic weakness and deflation are prevalent.

But prices across the broad commodity complex are rising relative to bond prices (chart). A rising commodity-to-bond price ratio is inflationary and often precedes or coincides with higher interest rates. Higher rates in turn are usually a negative for stocks.

Stocks, Bonds and Risk Appetite

Looking in general at US large-cap stocks, near-term price action appears to be bearish. Mid-term action is bearish and long-term action is bearish (chart).

Consumer discretionary stocks are underperforming consumer staples (chart). Discretionary stocks tend to lag when the economy is perceived to be struggling or contracting.

Financial stocks are underperforming utility stocks (chart). This is typical when economic conditions are seen as faltering and volatility is expected to rise.

Stocks in general are currently favored over bonds (chart) and US stocks are currently favored over both developed (chart) and emerging market (chart) foreign stocks.

Lastly, high-yield “junk” bonds are outperforming “risk-free” US treasuries on the whole (chart) as credit spreads narrow. Credit spreads generally narrow when investor appetite for risky assets is robust or increasing. That fact, in turn, is near-term positive for stocks.

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