Intermarket OutlookAs of 01/24/2020 |
The current economic environment in the US appears to be weakly inflationary. The outlook for US stocks is bullish. Commodities are weakly bearish. Bonds are 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 bearish since December, 2019 (chart). A falling dollar is inflationary and points to higher commodity prices.
Gold (chart) and oil (chart) prices (leading indicators of inflation) are both rising, adding strength to 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.
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 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 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 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.