Hello everyone,
In today’s post, I will begin by showing how the US Dollar and rates are poised for the next leg lower. Meanwhile, many equity indices and sectors are on multi-year support and ready for upside.
We could see a rotation with rates easing and a bifurcation in equity valuations and insider activity. However, large-cap growth stocks remain leaders, and any rotation will likely continue to be very selective.
US Dollar and Rates
Inflation has been a threat this decade after 40 years of falling interest rates. In response, rates went from record lows to multi-decade highs during 2022. Prices of essential commodities, such as lumber, wheat, and corn, have since returned to pre-Covid levels.
Despite the progress, rates have remained stubbornly elevated to ensure inflation doesn’t re-emerge. This has put pressure on several parts of the equity market, especially unprofitable small caps with high debt, regional banks, and consumer-discretionary stocks.
The US has been in a stronger position to combat inflation than other countries, so the Dollar has been strong. The US 10-year Treasury yield remains 20-320bps higher than that of the UK, Germany, and Japan. Generally, the higher this rate spread, the stronger the US dollar has been against the corresponding foreign currency.
But look at what’s now transpiring.
The US 2-year yield is breaking down, and the US Dollar is on the verge of doing the same relative to major currencies such as the British Pound.
Notice how peaks in both rates and the Dollar coincided with lows for the S&P 500, the most recent being in October and April.