July 5, 2022
Good morning,
The second half of the year begins in earnest this holiday shortened week, and markets this morning are tracing out price action that has become oh-so-familiar thus far in 2022; weaker equities (futures down a percent), higher Treasury yields (US 10yr +5bps to 2.92% from 2.87% early this morning), and a stronger dollar (DXY up a percent which is a lot).
However, while nothing seems to have changed from the truly miserable first half for stocks and bonds, there is the slightest ray of sunshine peaking through from another asset class that may be cause for a better second half. Weakness in the commodity market, pushing it into bear market territory over the past month, hasn’t garnered many headlines, but it may have positive implications for stocks and bonds ahead. It is an encouraging sign that bond yields have declined since the CRB Index (the Commodities Research Bureau Index is the S&P 500 for commodities) peaked on June 9. The U.S. 10yr Treasury for example has seen its yield drop 70bps (3.50% peak to 2.80% last week) in the past 3 weeks. If commodities maintain their current trajectory, it would likely be interpreted as a sign of waning inflationary pressures. If so, you would expect stocks to follow their bond brothers and rally off their price lows.
Further signs of peaking inflation and tightening pressures easing on the Fed would likely be enough for a meaningful second half rally in stocks. Whether that rally is the bear market kind, or the resumption of the secular bull market, is impossible to say at this time. The nature of the rally itself will be the largest determinant of its duration.
Please note – if despite these positive signs, inflation continues to heat up, with commodities regaining upside momentum in the months ahead, the case for 1970s-style stagflation will gain support, as will the case for a secular bear market in equities and a concurrent secular bull in commodities. It’s out there, and we’ll be watching very carefully.
See you Thursday –
Be well,
Mike