Summary:
1. The inflation trade continues to work.
2. Bearish investor sentiment may be a signal for continued strength in growth stocks.
3. Global Equities hold above long term support, showing resilience.
The Inflation Trade
Whether we are looking at domestic stocks, bonds, commodities, or foreign markets, one thing remains clear: the inflation trade is still working. The S&P 500 made new multi-year lows against commodities on Friday while the US 10 Year Treasury rate made new multi-year highs. Everywhere we look in the market, assets that tend to do well in higher interest rate environments are showing continued strength both on an absolute and relative basis. We aren’t just seeing strength in Energy, but also Financials, Industrials, and Materials. This, combined with relentless selling in the bond market paints the picture that these trends are here to stay for now. Investors have to think about what their investment strategies need to look like in the event we are in the beginning of a secular bull market for commodities.
Overall Market Outlook
Last week we had a number of bullish breadth thrusts in the growth sectors which have seen the brunt of the selling since the beginning of the year. In the past, these moves typically happened toward the beginning of trends, not the end. From a momentum perspective, bullish divergences resolving to the upside with these breadth thrusts is a sign that there may be more near-term strength to come. Despite this strong momentum, investor sentiment remains historically bearish for both investment advisors and individual investors alike. While we see a clear sector rotation still in effect, the strength we saw in these growth stocks last week must be noted.
If we look across the globe at other countries’ stock markets, we see similar trends to those we are seeing here. Canada’s stock market is more heavily weighted in Financials, Energy and Materials and is finally outperforming the S&P 500 after a decade of underperformance. This isn’t surprising given the strength of these particular sectors. England and Germany both successfully held above key support levels on the most recent selloffs, just like we saw in the United States. In a healthy market, stocks don’t just continue going straight up. Markets have to digest the gains while investors take profits and rotate sectors and we aren’t just seeing this action here in the United States, but also across the globe at a time when investor sentiment is incredibly low. There are opportunities out there for those who are observant enough to find them.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.