Intermarket Outlook As of 11/30/2021

The current economic environment in the US appears to be deflationary. The outlook for US stocks is firmly bullish. 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 Bonds

The US dollar’s outlook has been bullish since September (chart). A rising dollar is deflationary and points to lower commodity prices.

Oil prices (chart) are falling but gold 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 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. Note, however, that the high yield-to-risk free bond ratio is nearing a bearish reversal. Such a reversal would shift the near-term stock outlook from bullish to bearish.