Intermarket Outlook As of 04/25/2018

The current economic environment in the US appears to be weakly inflationary. The outlook for US stocks is 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 May, 2017 (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 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 bullish. 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 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). US stocks are currently favored over those of developed foreign nations (chart), but emerging market stocks are currently favored over US stocks (chart).

Lastly, high-yield “junk” bonds are outperforming “risk-free” US treasuries (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.