Intermarket Outlook As of 12/21/2022

The current economic environment in the US appears to be inflationary. The outlook for US stocks is bearish. Commodities are bullish. Bonds are weakly 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 bearish since October (chart). A falling dollar is inflationary and points to higher commodity prices.

Gold (chart) and oil (chart) prices (leading indicators of inflation) are both rising, adding strength to the inflationary implications of the dollar’s trend.

Base metal prices are rising relative to bond prices (chart). The ratio of base metals to bonds generally rises when economic strength and inflation are prevalent.

But prices across the broad commodity complex are falling relative to bond prices (chart). A falling commodity-to-bond price ratio is deflationary and often precedes or coincides with lower interest rates. Lower rates in turn are usually supportive of 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 but long-term action is bullish (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), while both developed (chart)and emerging market (chart) foreign stocks are favored over US stocks.

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