January Market Thoughts: Dollar Strength, Stock Weakness, Stock-to-Bond Ratio

This post was originally posted on Descending charts

  • US Dollar Speculative Positioning and Bullish Sentiment Grows

  • The equity vs. bond ratio is fragile (momentum and valuation wavering)

  • Near-term upside is possible out of the greenback amid hawkish tone from the Fed

There’s a hint of 2008 in the air to start 2022. US equities had a dismal month on a hot day and global oil prices soared above $90. Remember the stock market‘s rocky start in 2008 amid the boom. Of course, there are a host of differences between now and then, but after nearly two years of impressive gains, stocks may continue to be on shaky ground given valuations as the year progresses.

For January, the decline of more than 5% while small and mid caps fell more than 7%. Markets outside the United States held up better. Foreign developed stocks fell 4% and fell only 2%. Global small caps also suffered the biggest losses with a decline of almost 6%. This is the worst start to the year since 2009 for US equities. Meanwhile, the value has beaten growth the most since February 2001.

The performance of the S&P 500 sector was led by — it rose 19%. Financials was the only other sector in the dark, but only fractionally (although it was particularly strong). Discretionary securities, despite a massive rebound at the end of the month, were the worst with a drop of 9.5%.

It was also a soft month for the bond market. The aggregate US fixed income index was down 2%, while high yield corporate bonds and Treasuries fell a bit more. International obligations have likewise diminished.

So, what awaits you for the rest of the year? “As January goes, so goes the year,” they say.

Indeed, we have a bearish view on stocks vs bonds over the interim period. This asset allocation theme is based on weak leading indicators, a persistent “growth scare” narrative and deteriorating technical data and sentiment.

Something we have noticed in our Global Cross Asset Market Monitor report released to clients every Monday is the weakness in risky bonds in recent weeks. Additionally, CDS spreads have increased. These are signs that liquidity is drying up a bit and that large institutions are less willing to take risks. We will be keeping an eye on the evolution of these market indicators over the next few weeks to see if the trend continues. If so, expect risky assets to give way to safe havens such as Treasuries and Treasuries. Commodities could continue to benefit from a favorable wind given the momentum recorded since the end of last year.

The dollar is also showing price strength over the past few months. Our featured chart illustrates increased speculative positioning in the greenback. Sentiment is also becoming very bullish.

The USD price chart still has some work to do to confirm a bullish breakout. After jumping above 97 in late January, it gave back some gains in early February. While we see short-term upside risks for the DXY, the longer-term trends are bearish.

US Dollar – Sentiment and Positioning

Conclusion: The US stock market had its worst start to the year since 2009. Tech stocks were crushed, losing nearly 10%, their worst monthly performance since November 2008. Bonds, however, were not chained.

Where we find strength is in the US Dollar as investors seek safety, and sentiment and futures positioning demonstrate the strong momentum underway. Currency trends will be important to watch in the coming months as a hawkish Fed could support the greenback.

Sallie R. Loera