April 13, 2023: Positive signs for equities continue to build
There is mounting evidence for higher levels coming for equities. This is not coming from financial statements or stock valuations or inside information from the Fed, it is coming from the bond market.
The US bond market is often overlooked as a determining factor when it comes to stocks. The US bond market represents about $51.3 trillion. The NYSE is about $22.8 trillion.
In a "normal" inflationary environment, bonds and stocks move in the same direction. Bonds and commodities generally trend in inverse directions. Keep in mind that an "inflationary environment" does not mean runaway inflation. It means that inflationary forces are stronger than deflationary forces.
In Chart 1, the benchmark US 10-year appears to have found price support at 110.00 as yields crest at 4.00%. The US Inflation Rate is easing. This suggests a slower pace for the Fed's tightening policy.
Chart 2 illustrates the impact of bond prices on commodities. As the 10-year T-bond found a floor in late 2022, the S&P Commodity Index (GTX) peaked and started to decline.
Chart 3 adds more evidence to the expected advance in equities. The final chart is a 90-day snapshot of performance between bonds, equities, commodities, and the US dollar.
The two asset classes that advanced during the last three months are bonds and equities. The two assets that declined are commodities and the US dollar. This show of strength between the four asset classes is supportive of the inflationary intermarket relationship.
Bottom line: The positive signs for higher equity prices in 2023 are coming from the relationship that stocks have with bonds during an inflationary environment. US bond prices appear to have bottomed over the last few months. With US inflation easing (9 months of steady declines), the Fed is likely easing back on its interest rate policy. Stocks and bonds move together in an inflationary environment.
The outlook for the S&P 500 is for more consolidation under 4,200 over the next few months and then rising to 4,500 in late 2023.