Interest Rates in the United States hit new 52-week lows last month. But from the looks of it, the commodities market and stock market are not in agreement with that direction. It’s when we see divergences among asset classes that it gets my attention.
Today we’re looking at the divergences between stocks, bonds and commodities that I believe are pointing to higher rates this quarter. If we’re going to take the weight-of-the-evidence approach, it’s 2 to 1 in favor of rising interest rates.
Intermarket analysis is a great tool. It helps us look at asset classes from a different perspective. I have an entire workbook of important ratios that we monitor closely. There are two ratios in particular that we follow when analyzing rates. The first is Copper vs Gold. One is more representative of economic growth while the other tends to be more defensive. While these theories may or may not be the case, the ratio between the two looks exactly like US 10-year yields, and that we can’t argue against.
In the stock market, high dividend paying utilities stocks tend to see a sympathy bid when rates are falling. In this case, fixed income investors that aren’t getting their yields in the bonds market have to go to stocks. The same is true when rates are falling and there is less of a need to buy utilities. This is why the ratio of Utilities vs the S&P500 looks like the inverse of U.S. 10-year yields.
Here is a chart of the three of them over time. What catches my attention is the recent divergence. With lower lows in rates last month, Utilities Relative (inverted) put in a higher low and the Copper / Gold ratio did as well. This bullish divergence among asset classes suggests to me that stocks and commodities are pricing in higher rates, not lower ones:
Are these just random lines and colors and arrows on a chart that I am pointing out to prove my narrative? Maybe.
Those of you who have been following along (over a decade for some of you), I don’t have a narrative. I really don’t give a shit of bonds go up or down. Gold can go to zero tomorrow and it won’t change my life. The stock market can get cut in half or double. The implications are not my problem.
We’re trying to get the direction right. We’re trying to isolate very specific risk vs reward opportunities that are skewed in our favor.
If I see something that stands out, I’ll point it out. That’s what we do here. We try to add value to your process by identifying things you may not have seen throughout your work.
We’re not trying to replace what you do. Our work is a supplement to what you’re already doing.
Here’s a closer look:
Maybe this divergence above gets you thinking. Maybe you didn’t know these correlations even existed. Maybe you did, but didn’t catch these divergences. Or maybe you caught them too but forgot. Or possibly, you caught them and we’re completely on the same page.
Either way, I think this is an interesting development in bonds.
Tell me what you think. Meaningless? Or an important divergence?