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Market signals across asset classes are suggesting investor expectations for economic activity and corporate fundamentals is decelerating.

Market signals across asset classes are suggesting that investors are likely pricing in an expectation of a deceleration in the rate of change for economic growth, inflation, and corporate fundamentals. 

In the fixed income markets, longer-term interest rates declined into the end of last week and the thirty-year U.S. Treasury yield did not get back to the prior high of early 2021.

Source: Koyfin.

As a result of this decline in long-term interest rates, Treasury yield curves continue to flatten.  

Source: Koyfin.

In the credit market, high-yield spreads widened at the end of last week but remain at low absolute levels.  A continued widening in the coming weeks would be a negative sign that investors expect future corporate fundamentals to decline.

Source: Koyfin.

In the currency market, the dollar index started to increase last week.  The one-month performance compared to developed markets is mixed, with the defensive pairs (Yen and Swiss Franc) performing well and most of the higher beta/commodity sensitive pairs lagging (AUD, NOK).  On a three-month basis, the U.S. dollar is outperforming all developed pairs except the Swiss Franc.

Source: Koyfin.

The broad commodity market index made a new high last week as oil prices have reaccelerated.

Source: Koyfin.

Other commodities such as the agriculture index, the London metal index, natural gas, and lumber are still below their prior highs.  

Source: Koyfin.

Oil volatility has been elevated since the sell-off in December and even during the recent increase it has consistently remained above 40.  The volatility of other commodities, like copper and natural gas, have also been increasing recently.

Source: Koyfin.

Equity market trends have been favoring more defensive industries and factors.  Over the last one and three months, Energy has benefited from an increase in oil prices while at the same time defensive areas, like Utilities and Consumer Staples, have outperformed Technology, Consumer Discretionary, and Communication Services.  The industries that are underperforming are dominated by mega-cap growth names that had been leading since March 2020 (Apple, Microsoft, Tesla, Amazon, Facebook, Google, Netflix). 

Source: Koyfin.

From a factor standpoint, Growth, Momentum, High Beta, and Small Cap have been lagging.

Source: Koyfin.

Equity volatility is starting to accelerate, and the gap is closing between S&P 500 (VIX), small caps (RVX), and NASDAQ (VXN). 

Source: Koyfin.

If market signals continue their current path, investor expectations for economic growth, inflation, and corporate fundamentals will likely decline.  This could lead to more periods of elevated volatility in the near term.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

 

Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC