Intermarket Outlook As of 02/26/2020

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

The US dollar’s outlook has been bearish since December, 2019 (chart). A falling dollar is inflationary and points to higher commodity prices.

Gold prices (chart) are rising but oil prices (chart) are falling, casting some doubt on 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 Appetite

Looking in general at US large-cap stocks, near-term price action appears to be bearish. 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 underperforming “risk-free” US treasuries on the whole (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.