Intermarket Outlook As of 10/21/2020

The current economic environment in the US appears to be firmly inflationary. The outlook for US stocks is bullish. Commodities are bullish. 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 March (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 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 Appetite

Looking in general at US large-cap stocks, near-term price action appears to be bullish. Mid-term action is bearish but 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.

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 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.