Intermarket Outlook As of 07/22/2021

The current economic environment in the US appears to be weakly inflationary. The outlook for US stocks is firmly bullish. Commodities are weakly 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 March, 2020 (chart). A falling dollar is inflationary and points to higher commodity prices.

Oil prices (chart) are rising but gold prices (chart) have pulled back from recent highs, casting some doubt on the inflationary 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 bullish. Mid-term action is bullish and long-term action is bullish (chart).

Consumer discretionary stocks are outperforming consumer staples (chart). Discretionary stocks tend to lead when the economy is perceived to be buoyant or expanding.

Financial stocks are outperforming utility stocks (chart). This is typical when economic conditions are seen as recovering following a period of contraction.

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.