Summary
After a few more weeks of choppy trading, the fact that we are still in a range-bound market remains abundantly clear. The risk-on and risk-off indicators continue to oscillate aimlessly as equity indexes can’t seem to decide on a direction for more than a day or two. However, there are a few clearly defined trends that we can use to navigate an otherwise difficult market.
Bonds
Bonds have performed so poorly during the first quarter this year that it would be hard not to pay attention. When bond prices fall, shouldn’t that be good for equities? Yes, but also no. What the equity market really likes is predictability. Bond prices have been in free-fall since the end of last year as bond yields have risen dramatically, only adding fuel to the fire of uncertainty in the equity market. At the same time, Bank stocks, which tend to perform well in a rising rate environment have underperformed since the start of the year. During the same time period, Utility stocks, which tend to perform poorly in a rising rate environment have outperformed. When correlations begin to fall out of line, it is usually a sign that the market is going to continue to be a choppy mess.
Commodities
This isn’t the first time I’ve written about the strength in commodities and it likely won’t be the last. Over the last couple of months, commodities have outperformed both the equity and bond markets and have broken out of a decade-long downtrend. Historically, when commodities or any asset class moves with this much relative strength, in either direction, investors need to pay attention. In the case of commodities, not only do we have to decide on how to take advantage of the higher prices, but we also have to assess the ripple effect of what higher commodity prices mean for the rest of the market. What types of companies will be strong in an environment where commodities continue to make new highs week after week? What companies will be weak? The last decade was dominated by large-cap technology companies. It looks as though, at least for now, there has been a changing of the guard.
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 investing involves risk including loss of principal.
The economic forecasts set forth in this material may not develop as predicted.
Bonds are subject to market and interest rate risk if sold to maturity. Bond values will decline as inerest rates rise and bonds are subject to availability and change in price.