(Premium) January FICC Outlook

Fixed Income

The bear market for bonds that began in 2020 looks set to continue in 2023. The swing lows from last summer acted as resistance in November/December, and now 10-year Treasury futures are approaching their lows from the fall.

There’s simply no evidence here that this trend is set to reverse, so we want to avoid being long bonds (at least for the purpose of capital appreciation – locking in 5% yields and holding individual issues until maturity might be attractive to some of you).

The trajectory of fixed income has pretty significant implications for the direction of stocks, too – at least it did in 2022. Check out how closely 10-year yields and the S&P 500 have moved together.

If that relationship holds and bond prices continue to head lower, stock will move lower, too.

In that case, growth stocks would most likely continue to underperform their value counterparts. Higher yields have historically led to lower returns for growth stocks – the higher discount disproportionately lowers the present value of future cash flows for companies that are expected to increase earnings at a faster rate.

That helps explain why growth peaked relative to value in August 2020:

The Growth/Value ratio has reached a level worth watching – the 38.2% Fibonacci retracement from the entire 2006-2020 rally. That’s a logical area to find some support, but it’ll depend on how yields act over the coming months, too.

Currencies

The US Dollar was the story in 2022. A huge rally for the first three quarters of the year seemed to be the catalyst for lower stock prices (along with higher yields). With each successive high in the USD, equities set new lows. Look how closely they moved together all year:

In December, though, the relationship broke down. The Dollar’s strength reversed, but stock prices fell anyway. Does that divergence mark the end of the correlation? Or is a catch-up move coming?

The Dollar’s weakness looks like a temporary development. The reversal has brought the US Dollar Index back to the scene of last summer’s breakout. The former peaks from 2017 and 2020 should offer some support:

Here’s a closer look. Notice how the Dollar index never got oversold during this pullback.

That underlying strength gives us the impression that the Dollar’s rally hasn’t quite run its course. We look for a rebound in the first quarter.

Bitcoin

Bitcoin is stuck in an indisputable downtrend, having broken the summer lows in November following the FTX meltdown. Former support around 19000 is now overhead supply. The next area to watch on the downside is 13000. There’s really no good reason to get involved from the long side unless we’re back above 20000, and even then, we’d be fighting the trend.

Precious Metals

The strength in silver that we pointed out in our December note continued throughout the month. Silver is now in the bottom third of the range it set up from 2020-2021 and looks likely to test the top end near $29. We’re still targeting that level with a stop set at $22.

Gold’s rally continued, too, and the yellow metal looks even more constructive than it did before. We wouldn’t be surprised to see it back above $2000 in the coming months. A drop back below $1800 would change our minds.

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