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Intermarket Analysis

Geopolitical uncertainties in Europe (i.e., Ukraine-Russia), the Middle East (i.e., Israel-Hamas), and Asia (U.S.-China trade wars), recession fears, inflation concerns, interest rates, Fed policies, and other corporate and macroeconomic issues tend to lead to increased volatilities across financial markets.

Instead of focusing on headline news, it may be more effective for investors to closely monitor the relationships between the four asset classes, including stocks (SPX), bonds (TNX), commodities (CRB Index and Gold), currencies (USD), and investment styles (growth versus value and Technology versus SPX) to understand the sustainability of the primary trends and potential trend reversals.

There are well-defined historical relationships between stocks, bonds, commodities, and Currencies, at least over the longer term.

Understanding these relationships can help investors better manage their financial goals and, most importantly, identify the various stages of an investment/business cycle.

An inflationary environment differs from a hyperinflationary or runaway inflationary cycle. Inflationary periods occur when inflationary forces are stronger than deflationary forces. Under this scenario, the relationships between the above four asset classes are as follows:

Stocks (SPX) and bonds (TNX) are positively correlated. They tend to move in the same general direction. Bonds tend to lead stocks in predicting pivotal trend changes.

Bonds (TNX) and commodities (CRB Index) are inversely correlated. The relationship moves in the opposite direction.

Currencies (U.S. dollar) and commodities (CRB Index) are also inversely correlated.

Stocks (SPX) and Commodities (TNX) tend to be positively correlated.

A deflationary environment occurs when there are nominal or even no inflationary pressures. The four asset classes will have the same Intermarket relationships as during an inflationary environment except for one specific relationship - stocks and bonds are often inversely correlated during deflationary periods. Stocks rise when bond prices fall, and vice versa. It translates to stocks and interest rates also rising and falling in unison.

Enclosed below are the Core Consumer Price Index (CPI), the Core CPI YOY, USD, CRB, TNX, SPX, IWF/IWD, XLK/SPX, and Gold.

Minor divergences or discrepancies from historical relationships alert investors and traders to potential changes in the primary trend. However, if these trends persist, they warn of potential peaks/bottoms and impending directional trend changes in the asset classes.

Encouraging signs that inflationary pressures may be abating, many investors expect the Fed to halt interest rate hikes or even to unwind them next year. The direction of interest rates may continue to play a pivotal role in the performance of financial assets. If interest rates come down, the U.S. dollar will fall. But it will lift commodity prices, specifically metals/miners and stocks.

The current interest rate environment requires close attention as the future direction of interest rates will impact asset classes. The exceptionally low rates of the Greenspan and Bernanke era are probably over, as the easy money from the central bank supported equities and bond prices (lower yields). The Powell-led era will have a different impact on investors and financial assets. Will the normalization of interest rates lead to new investment opportunities and risks?

Source: Chart courtesy of

Source: Chart courtesy of

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