Intermarket Outlook As of 09/27/2022

The current economic environment in the US appears to be firmly deflationary. The outlook for US stocks is bearish. Commodities are bearish. 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 is now bullish (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 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 bearish. Mid-term action is bearish and long-term action is bearish (chart).

Consumer discretionary stocks are underperforming consumer staples (chart). Discretionary stocks tend to lag when the economy is perceived to be struggling or contracting.

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.