Intermarket OutlookAs of 06/29/2022 |
The current economic environment in the US appears to be deflationary. The outlook for US stocks is bearish. Commodities are bearish. Bonds are weakly bullish.
Detailed asset class performance breakdowns can be viewed here. High-level intermarket trends are examined more closely below.
The Dollar, Commodities and BondsThe 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.
What’s more, 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 AppetiteLooking in general at US large-cap stocks, near-term price action appears to be bullish. Mid-term action is bullish but 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 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.