Intermarket OutlookAs of 01/16/2019 |
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 weakly 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 bullish since May, 2018 (chart). A rising dollar is deflationary and points to lower commodity prices.
Oil prices (chart) are falling but gold prices (chart) have bounced off of recent lows, casting some doubt on 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 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.
Bonds are currently favored over stocks in general (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 (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.