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January Market Musings: USD, Equities, Stock/Bond ratio

  • US Dollar speculative positioning and bullish sentiment are surging

  • The stocks vs bonds ratio is on shaky footing (wavering momentum and valuation)

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

There is a little feel of 2008 in the air to start 2022. US equities had a dismal month while inflation ran hot, and global oil prices climbed above $90. Recall the rough stock market start in ‘08 amid surging crude oil. Of course there are a bevy of differences between now and then, but after nearly two years of impressive gains, stocks might continue to be on shaky ground given valuations as the year progresses.

For January, the S&P 500 was down more than 5% while small and mid caps were off more than 7%. Ex-US markets fared better. Foreign developed stocks were down 4% and Emerging Markets were only down 2%. Global small caps also suffered the biggest losses with a nearly 6% drop. It was the worst start to a year since 2009 for US stocks. Meanwhile, value beat growth by the most since February 2001.

The S&P 500 sector performance was dominated by energy – it was up 19%. Financials were the only other sector in the black, but just fractionally so (though global banks have been particularly strong). Discretionary, despite a massive late-month bounce, fared the worst with a 9.5% decline.

It was a soft month for the bond market, too. The US aggregate fixed income index was off 2% while high yield corporates and Treasuries were down a bit more. International bonds declined similarly.

So what’s on tap for the balance of the year? “As goes January, so goes the year,” they say. Indeed, we have a bearish view on stocks vs bonds over the intermediate timeframe. This asset allocation theme is based on soft leading indicators, a persistent “growth scare” narrative, and deteriorating technicals and sentiment.

Something we noticed in our Global Cross Asset Market Monitor report issued each Monday to clients is the weakness among risky bonds in recent weeks. Moreover, CDS spreads ticked higher. These are signs that liquidity is drying up a bit and large institutions are less willing to take on risk. We will keep tabs on the progress of these market indicators in the coming weeks to see if the trend persists. If so, expect risky assets to give way to safe-haven plays such as the DXY and Treasuries. Commodities could continue to see a tailwind given its momentum since late last year.

The Dollar also exhibits price strength over the last several months. Our featured chart illustrates heightened speculative positioning in the greenback. Sentiment is also turning very bullish. The price chart of the USD still has some work to do to confirm a bullish breakout. After jumping above 97 in late January, it has given back some gains into early February. While we see near-term upside risks to the DXY, longer-term trends are bearish.

Featured Chart: USD moves higher amid bullish sentiment and elevated speculative futures positioning trends

chart of US dollar sentiment and futures positioning

Bottom Line: The US stock market got off to its worst start to a year since 2009. Tech stocks were smashed, losing almost 10% - its worst monthly performance since November 2008. Bonds did not catch a bid, however. Where we do find strength is in the US Dollar as investors seek safety, and sentiment & futures positioning demonstrate the strong momentum underway. Currency trends will be important to watch in the coming months as a hawkish Fed could bolster the greenback.

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