Intermarket Outlook As of 12/14/2018

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 May (chart). A rising dollar is deflationary and points to lower commodity prices.

Gold (chart) and oil (chart) prices (leading indicators of inflation) are both falling, adding strength to the deflationary 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.

What’s more, 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 but 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 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.