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Housing has been strong, but mortgages are harder to get

By some measures, the US housing market has been extremely strong. Sales of new homes are up more than 30% year-on-year, as many people are seeking to leave big city centers and buy single-family homes in the suburbs.

However, the chart below shows some of the extreme and offsetting influences on the housing and mortgage markets right now.

Mortgage and Housing Indicators

Mortgage rates have plunged to all-time lows (top section in the chart), reducing the payments needed to buy a house with a mortgage. This has led to a surge in mortgage purchase applications (second section).

While higher demand has pushed prices for houses up to a new high ($310K median for existing homes, third section), that demand is also running into the corresponding fact that many people who already have houses do not want to sell right now. So the supply of houses on the market has plunged (fourth section).

Lower mortgage rates have helped improve the housing affordability index (fifth section), but rising prices have now limited the improvement. Affordability is much better than in 2018 and similar to its level in 2014-16.

We cannot forget, though, that the economy is still very weak and employment is still far below pre-COVID levels. This means that there are likely fewer credit-worthy borrowers, and banks have tightened conditions for loans of all types significantly this year.

Indeed, the last section of the chart shows the Mortgage Bankers Association Mortgage Credit Availability Index. It measures availability of mortgage loans based on underwriting standards used by lenders. Higher readings indicate greater availability of mortgages. The plunge in the index this year reflects the dramatic tightening of lending standards for mortgages (e.g. requiring higher credit scores and income standards, lower loan-to-value, etc.). So while many people are applying for mortgages, a greater number are also likely not being approved and actually getting the loans. Houses are popular and appear affordable IF you can get a mortgage (or don’t need one).

Online shopping trends remain a key driver of equity returns

The growth of online shopping has been well-established for years now, but the pandemic has prompted an acceleration in that trend, which continues to be felt in relative stock returns.

The chart below shows the year-on-year growth rates of total US retail sales and online retail sales (non-store retailers) over the last five years (based on monthly retail sales reports from the US Census Bureau). We can see that online sales have been growing significantly faster than total sales the entire time, and most notably, are now near their highest growth rate (20%+) even as total retail sales dropped sharply earlier this year and are currently roughly unchanged from year-ago levels (indicating that non-online sales are down from a year ago).

The bottom section of the chart plots online sales as a percentage of the total. While there are seasonal swings in the monthly data, the 12-month average shows a clear upward trend over the last five years, with a distinct acceleration most recently. In the last five years, online sales have grown from less than 10% of all sales to almost 15% (on a 12-month basis), and briefly surged to 18% amid the lockdowns earlier in the year. Online and Total US Retail Sales Growth

The reasons for the shift to online shopping during the pandemic are mostly obvious, as the ability to shop in physical stores was sharply limited in many areas due to lockdowns and worries about the coronavirus. This is, however, another example of a trend that was in place well before COVID-19 arrived, and has simply accelerated. While store-based retailers may take back a bit of share near-term, the longer-term trend towards online shopping (at least for things that can be bought online) and entertainment services like video games looks likely to continue.

What about the impact on stock prices? The year-to-date returns to some industries in the broad S&P 1500 Supercomposite Index that are closely tied to these trends make the point (example constituents are shown for reference in parentheses — these are not recommendations to buy or sell). For comparison, the S&P 1500 index has returned 8.6% for the year-to-date.

  • Internet & Direct Marketing Retail (Amazon, EBay, Etsy): +71%
  • Air Freight & Logistics (FedEx, UPS): +54%
  • Interactive Home Entertainment (Activision Blizzard, Electronic Arts, Take-Two Interactive): +32%

One clear loser has been commercial real estate, especially the REITs (real estate investment trusts) that own retail space (malls, etc.) that rely on store-based retailers. Department stores make up many of those, and have been hurt badly, as have some of the companies that make the products sold in stores, particularly fashion clothing and accessories.

  • All REITs: -9%
  • Retail REITs (Simon Property Group, Regency Centers, National Retail Properties): -40%
  • Department stores (Macy’s, Nordstrom, Kohl’s): -62%
  • Apparel & Accessories (VF Corp., Ralph Lauren, UnderArmour, Movado): -28%

The impact of the shift to online buying is ongoing, as is the impact on company earnings forecasts and stock returns. While in-person shopping will always be there, it seems that there is scope for further shifts toward online shopping, and finding the winners and losers from it will likely remain important even after the impact of COVID-19 has eased.

Putting the Fed’s balance sheet in perspective

Along with fiscal stimulus, the aggressive support of financial markets by the Federal Reserve (and other central banks) has been a key to the gains in risk assets since April. In our view, stock and bond prices would not be as high as they are if not for the perception that the Fed will step in with additional support if markets get too volatile. This perceived “Fed put” is on top of the ongoing bond buying programs (excluding the immediate post-COVID surge) that are currently running at a rate of about $80 billion per month for Treasuries and $40 billion per month for mortgage backed securities, though some of this replaces expiring bonds.

So the Fed continues to have a heavy influence on debt markets, and thus indirectly on equity and other financial markets.

The size of the Fed’s balance sheet (the value of all assets it holds) used to be far smaller relative to the economy or the markets, and only began to be a major part of the monetary policy toolkit in 2008 in response to the Great Financial Crisis. Previously, the Fed’s control of short-term interest rates was sufficient and did not require as much balance sheet activity, but once short-term policy rates hit zero in 2008 (and again this year), new tools were needed.

The chart below plots the ratio of the Fed’s balance sheet to US nominal GDP, perhaps the most common way of putting the Fed’s monetary policy actions in perspective. From a pre-crisis level of around 6% of GDP in 2007, three rounds of quantitative easing (“QE”, or bond buying) starting in 2008 pushed the ratio up to about 25% of the size of the US economy in 2014. Then the Fed allowed some assets to “roll off” (bonds maturing and not being replaced with new ones) and effectively shrink the balance sheet relative to the economy. Several years of such a policy brought the balance sheet back to about 18% of GDP in early 2019.

Fed Balance Sheet Pct of GDP

This appears, in hindsight, to have been too small a size for the Fed’s balance sheet nowadays. It is important to recall that even before COVID hit earlier this year, in mid-2019 the Fed began lowering rates and adding to its balance sheet again to ward off interbank funding strains and signs of weakening economic growth. Then in response to the COVID-related shutdowns of the economy, the Fed made its most aggressive balance sheet movement to date. It bought nearly $3 trillion in Treasury, mortgage-backed, and other bonds very quickly, pushing its balance sheet size up to its current record level of about $7 trillion. This is now about 36% of US GDP.

While comparing the Fed’s assets to the size of the economy is a relevant comparison, we should also keep in mind that financial markets have generally grown faster than the economy. So it is also worth considering the Fed’s balance sheet in relation to the size of the debt and equity markets.

Notably, even with huge issuance of Treasuries recently to finance the US federal budget deficit, the Fed now owns over 20% of all publicly held Treasuries, more than it has in at least 20 years.

And it owns more than 30% of the mortgage-backed bond market, similar to what it owned in the aftermath of the Great Financial Crisis (which was heavily tied to the mortgage and housing market). This has helped push mortgage rates to all-time lows recently.

The chart below, however, plots the Fed’s balance sheet relative to the size of the US equity market. Now, to be clear, the Fed does not own US stocks (at least not yet, though other central banks like those in Japan and Switzerland do buy stocks), so this is just another way to scale the size of the Fed’s balance sheet (bond holdings) that may be of more interest to equity market participants.

Fed Balance Sheet Pct of US Market Cap

We compare the value of the Fed’s assets to the total equity market capitalization of the broad Russell 3000 index (the 3000 largest US companies). The picture there is notably different than the one using GDP as the scaling metric.

The initial surge in 2008-09 is very stark, pushing the balance sheet from around 7% of equity market cap up to a peak around 25%. Then the balance sheet oscillated around 20% of US equity market value as the Fed’s bond buying was roughly in line with the growth in the equity market through 2016. When the Fed began allowing its balance sheet to gradually decline, stocks continued higher and thus the Fed’s assets dropped sharply to a low of around 13% of equity market cap in 2019.

The Fed’s actions this year have provoked another jump in the ratio, but the change relative to the stock market has been less than that seen in 2008-09, due to the larger size of the stock market. The peak earlier this year was around the same 25% level relative to US equity market value, and since then the gains in stocks have outpaced the Fed’s buying of bonds and pushed the ratio back down somewhat.  The Fed’s assets now equal about 21% of US equity market value, not far from the average level during the 2009-2016 period. This reflects the fact that the stock market has grown significantly faster than US GDP in recent years as equity valuations have risen.

We can thus see that while the Fed is more involved than ever in financial markets by some metrics, by others it is not far from the ranges it has inhabited since the Great Financial Crisis started 12 years ago. And we should keep in mind that other central banks (Bank of Japan, European Central Bank) have balance sheets even larger relative to their economies or their financial markets. So the Fed could certainly continue expanding its asset purchases further before it would approach the relative size of some of its counterparts.

The Fed is thus both limited and nearly unlimited: it can print money to buy bonds (including corporate bonds now), i.e., make loans, in almost unlimited quantities, but cannot determine how the money they print is used (or not used), and cannot give outright gifts or grants. Only Congress, via the Treasury, can distribute truly “free money” that does not have to be paid back. And recent headlines suggest further delays in new fiscal policy support. That leaves the Fed as the main provider of market support, at least for now.

Tech Sector In The Driver’s Seat For US Relative Performance

In this post, we highlight the interaction of US outperformance versus the rest of the world this year and US Technology relative to Ex-US Technology.

  • First, the relative performance of the US equity market versus the rest of the world has been highly correlated with the relative performance of US Technology stocks relative to Ex-US Technology stocks.
  • Second, the outperformance of US Technology, and by extension the major US indices versus their non-US counterparts, looks likely to continue based on relative earnings estimate revisions patterns.

The chart below supports our first point. The US has outperformed the rest of the world this year by a healthy margin, based on the MSCI regional benchmark indices, as shown in the top section (plotted using rolling five-day averages). The lower section isolates the Technology sectors for the US and the Ex-US universe (also using MSCI indices) and plots the relative return of the US versus Ex-US Technology sectors.

US vs Ex US and Technology Relative Returns

We can see the close parallels in the charts for the year-to-date: as US Tech outperforms Ex-US Tech, so does the broader US market outperform the Ex-US aggregate. This in some ways seems unsurprising given the heavy weight that the Tech sector holds in the US compared to many non-US markets, but the relative weights are unrelated to the relative performance of the US versus Ex-US Tech sectors. We find that even after removing the effects of sector weightings, US stocks have outperformed Ex-US stocks this year, and this effect is particularly strong within the Technology sector.

Our second point is captured in the chart below. It shows our measure of aggregated earnings estimate revisions (the percentage of analysts raising versus lowering earnings estimates) for the US Tech sector and the entire Global Tech sector (which includes the US).

Technology Sector Revisions Breadth Metrics

We can see here that earlier this year, US and Global Technology estimate revisions (fundamental trends) were mostly moving closely together and slightly favored non-US Tech (US Tech revisions were slightly weaker than Global Tech revisions).  Both revision metrics improved sharply from the April lows through today. But the difference between the US and the Global Technology sector earnings estimate measures moved dramatically in favor of the US in July after Q2 earnings reports came out, and have generally remained there ever since. This suggests that US Technology stocks have a strong fundamental tailwind relative to Tech stocks outside the US right now. If that US Technology tailwind persists, the broader US market seems likely to resume outperforming the rest of the world in the coming months.

Does The NASDAQ-100 Correction Have Further To Go?

The NASDAQ-100 Index (often known by its ticker symbol, NDX), home to many of the mega-cap Tech-related Growth stocks that have dominated the US stock market this year, has seen some corrective action this month. A common question we hear is: is the correction enough to say the NDX is no longer “stretched” after its historic surge through the end of August?

The chart below provides some context. For four different indices, it plots the percentage difference between the current index level and its 200-day moving average, a common measure of the longer-term trend. Excessive deviations from the 200-day average are often viewed as signals of extreme investor behavior that are likely to revert back toward the average.

The chart includes the NASDAQ-100 (NDX) along with other major indices that do not include the mega-cap US Growth stocks that influence the NDX: the Russell 1000 (large-cap) Value index (“R1K Value”), the Russell 2000 small-cap index (“R2K”), and the MSCI All-Country World Excluding US Index (“ACWI Ex-US”).

Major Index Pct from 200 day MA

For much of the last 5 years, all of these indices typically traded within a range of +/- 10% of their 200-day average, with outlier declines visible in early 2016, late 2018, and of course March 2020.  Movements of more than 10% above the 200-day average were relatively rare, at least until early 2020 and again in mid-2020 for the NDX.

Indeed, the divergence between the NDX and the other major indices became quite stark this year, and remains so today. The NDX’s surge through August brought it briefly to more than 30% above its 200-day average, an extreme reading for any major index historically. The other indices showed nothing at all similar, only recently even managing to rise above their own moving averages, and none by more than about 8% at most.

So even after a correction in the NDX of about 12% from the peak and a modest recovery, the index is still 16% above its 200-day average. That is, even after a notable correction, the index’s divergence from its longer-term trend is still sufficiently extreme that it would be considered “overbought” or excessive by normal historical standards for major indices. By contrast, as of the close of Sept. 22nd, the other three indices in the chart were within a range of 1% below to 3% above their own 200-day averages, i.e., hovering very close to their respective longer-term price trends.

This metric by itself would indicate that the NDX is still at risk of further corrective action in order to move back to a more normal distance from its 200-day average. Of course, if the fundamental earnings trends for the NDX constituents are indeed that much stronger than those of the other indices, then a persistent gap could be warranted. And it is worth remembering the “moving” part of a moving average: the gap between the index and its moving average will narrow even if the index is simply unchanged for a period of time as the moving average catches up to the current price.

Our guess would be that the “easy money” period may be over, and there will be more choppy activity that narrows the gap between the NDX and its moving average, but doesn’t necessarily result in a massive decline from recent levels. We expect fundamentals for the large-cap Tech/Growth stocks to remain attractive in relation to other areas of the market on a longer-term basis, but the excessive optimism in the NDX seen around the peak in late August needs some time to be worked off.

Growth leadership easing as rotation increases

One of the most notable market trends in recent weeks has been the corrective action in the formerly high-flying US large-cap Growth stocks. The dominant Tech-oriented companies that have been responsible for much of the gains in US large-cap indices for several months finally saw some significant selling pressure in the first two weeks of September.

The first chart below shows absolute and relative returns for the S&P 500 Pure Growth and Pure Value indices (i.e., the style indices restricted to stocks that fall entirely into their indicated style, leaving out those with weight in both indices).

SP500 Pure Growth Value Indices

Key points:

  • The Growth index has been above its 50-day moving average since mid-April (and made new highs recently), but has now returned to that average after its recent correction. Any further declines could raise worries about an intermediate trend change.
  • The Value index has failed to even approach its January highs and has made little net progress since early June. It is also sitting near its 50-day average.
  • Growth/Value relative returns show little net change in the last two months, following a period of drastic Growth outperformance. This is consistent with our recent sector allocation recommendations to clients that have reduced style-level sector bets in favor of intra-style differences.

Corroborating the Growth/Value trends is the relative performance of the Growth-heavy Technology sector’s returns. Below is a chart showing our broad (300+ constituents), equal-weighted US Technology sector performance relative to the broad (2000+ constituents) US aggregate.  

US_Technology_RelPrice_Daily

We can see that after a period of sustained outperformance through the middle of this year, the relative returns for Tech have been much more mixed, and have dipped lately. Investor optimism toward Technology has shown signs of reaching extremes recently, and thus some corrective action is not surprising.

We continue to expect Technology to be a leading sector on an intermediate-term time frame, but both the sector and the overall market may have to go through further choppy trading activity and rotation near-term.

Is the rebound in earnings estimate revisions peaking?

Our measures of aggregated earnings estimate revisions trends have shown some of their most dramatic movements on record this year, and now may be looking extended.

After reaching historically extreme negative readings in April/May amid the initial COVID-19 lockdowns, earnings estimate revisions activity has now lurched back up to extremely positive readings. Better-than-expected Q2 earnings reports and the effects of massive monetary and fiscal stimulus are now finally reflected in analyst earnings forecasts. However, with fiscal stimulus weakening (and little imminent sign of movement toward new stimulus) and no meaningful further scope for interest rate cuts, the “snap-back” in earnings estimate activity could soon drop off.

The first chart below shows our measure of aggregated analyst earnings estimate revision activity in the US, for our broad universe of over 2000 stocks (equally-weighted) on a longer-term time frame. The data are month-end values except for the latest data point.  The red line represents the “breadth” of estimate revisions, meaning the aggregate net proportion of positive versus negative revisions (changes) to forward 12-month earnings estimates over the prior three months (i.e., number of analysts who have raised earnings forecasts minus the number who have reduced forecasts, as a percentage of the total number of analysts for each stock, scale right). The blue bars represent the “magnitude” of the month-on-month changes in forward 12-month forecasts, i.e., the average percentage change in earnings forecasts from a month ago (scale left).

United States_AbsERS

We can see that the low point in April matched (or exceeded) the extremes seen in the 2008 Great Financial Crisis (GFC) period, which is not surprising given that the drop-off in economic activity this year was greater than in the GFC. However, the combined fiscal and monetary stimulus recently produced in response was also greater than any previous post-WWII period, and so revisions metrics have shown a faster and more extreme rebound than at any previous point in our data. Stock prices appear to have moved ahead of aggregate estimate revisions, raising the question of whether this apparent good news for earnings is already priced in.

Perhaps more concerning is the risk that revisions (i.e., analyst sentiment) have reached highly optimistic readings now and may already be starting to revert. The chart below is calculated identically to the one above, but plots the daily figures (rather than monthly) over the last three years. Here we can see that the blue bars are already coming down from their latest peak, suggesting that the upward momentum of earnings estimate revisions may be fading now that Q2 earnings reports are over. The breadth series (red line) is based on revisions over the last three months, so it encompasses a full calendar quarter and is thus more stable. If revisions breadth starts to turn down (as it did after the tax-cut surge in early 2018) alongside current elevated valuations for equities, then the recent signs of higher stock market volatility could persist into Q4.

United States_AbsERS_Daily

Unemployment is still a huge issue

The latest weekly report on unemployment claims was released yesterday and provoked mixed responses depending on how the data was (or was not) analyzed. While unemployment claims data is not a perfect measure of the national job market, it is one of the most timely measures and gives a good picture of what is going on (though long-term comparisons can be difficult). Recent methodology and seasonal adjustment changes along with reporting of state-only (not federal) claims data have caused some confusion among investors.

The chart below shows the current preferred measure of ALL continuing (not initial) unemployment claims over the last 12 months, i.e., including the total of all the newly created or expanded federal unemployment assistance in addition to the regular state-level unemployment benefits that are normally reported. The data are not seasonally adjusted, and are shown on a log scale to better capture percentage changes. The picture is pretty clear: the trend in unemployment has not improved materially since May despite the signs of a rebound in economic activity. The positive side is that more unemployed people than ever before are getting at least some benefits while out of work thanks to the expanded federal support programs started in April (far more so than in the 2008-09 Great Recession). This highlights the economy’s current reliance on federal fiscal support.

Total Unemployment Claims

We can see that before February there were around 2 million people getting unemployment benefits (and fewer than that most of last year), which were all from regular state-level programs, and since May there have been steadily between 27 and 30 million people getting benefits from state and federal programs combined. The latest data (for Aug. 15th) shows the number back to the upper end at 29.2 million.  The US labor force (people over 16 deemed working or looking for work) as of the end of 2019 was about 159 million people. So over 18% of the pre-pandemic labor force is now collecting some kind of unemployment benefits, with no real trend of improvement visible yet.

Since part of the confusion about the weekly claims reports is related to the presence of the new federal programs in addition to the standard state programs, we break down the two categories in the chart below. Many state unemployment benefits normally only last 26 weeks, though there have been extensions in some cases. The major federal programs (Pandemic Unemployment Assistance, PUA, is the largest, with Pandemic Emergency Unemployment Compensation, PEUC, the other major one) are designed to both expand who can receive benefits (self-employed, gig workers, people working to support family at home, etc.) and extend the duration of benefits when state programs run out. As the months have passed, some people originally on state benefits (or who would normally have been ineligible) have switched over to the federal programs. We can see this in the chart, where the state-level data (blue line) has been declining from its peak, but the federal programs (red line) have been rising to largely offset the decline in the state data. Indeed, the total in federal programs has now exceeded those in state programs for the first time. This is why the total for all programs together has shown no material improvement (as in the first chart above), but those watching only the standard state-level data argue that employment conditions are improving.

US Unemployment Claims State vs Federal

While the supplemental benefit of $600/week for many of those getting benefits expired at the end of July, the benefits from federal support programs (PUA) are due to run out at the end of this year unless they are extended. Thus there will continue to be much attention focused on Congress as they debate if and how to provide additional economic support, with much uncertainty especially as the November elections approach.

The S&P 500 is top-heavy, but so are fundamentals

There has been much discussion about the increasing concentration of the market cap weighted indices in the US, with the S&P 500 now showing some of the highest levels of concentration among the largest constituents in history. The top 20 S&P 500 stocks (4% of the constituents) currently comprise 38.6% of the index weight, while the top five companies alone make up 23.8% of the weight.

But what about the underlying fundamentals? Are they as concentrated as the capitalization weightings? Broadly speaking, the answer is yes.

Following are a chart and two tables based on the top 20 stocks in the S&P 500. The chart below shows the proportion of total estimated operating income and sales made up by the top 20 S&P 500 stocks each month over the last 15 years. The figures are based on consensus analyst forecasts for net income and sales for the current fiscal year (currently FY2020), rather than trailing reported financials.

Top 20 SP500 Earn Sales

The first message from the chart is that the top 20 stocks do in fact make up an increasing proportion of income and sales, but the proportion is not historically outlandish. The largest stocks have tended to produce 30-40% of total index earnings and 31-35% of total sales, and are near the upper end of those ranges now.

And possibly more surprising to some, the proportion of earnings expected to be generated this year by the top 20 stocks is very similar to the proportion of market cap they hold (39.1% of earnings as of the end of July, vs 38.5% of market cap). The proportion of sales from the top 20 is similar but slightly lower at 35%. So the most heavily weighted stocks in the index are in fact producing a comparable proportion of earnings and sales in aggregate (not for every stock of course). The S&P 500 has long been “top-heavy” to varying degrees due to the presence of a few dominant mega-cap stocks, but right now that broadly captures the similarly concentrated nature of the underlying fundamentals.

What are the top 20 stocks by earnings and sales? The tables below show the latest monthly lists. While some names naturally appear on both lists, there are some notable differences in the lists of earnings versus sales, as profitability varies significantly in some cases. Amazon.com, for instance, has the second largest sales but is not among the top 20 for earnings. The same is true for a number of other well-known names whose earnings are either depressed right now or whose profitability is structurally lower.

List of Top 20 SP500 Net Inc List of Top 20 SP500 Sales

And finally, for some interesting historical perspective, the tables below show the top 20 S&P 500 stocks by earnings and sales 10 years ago (as of July 2010). Notably, the range of estimated profits among the top 20 was narrower 10 years ago, and a number of the names have changed over the last decade.

List of Top 20 SP500 Net Inc 10 yrs Ago List of Top 20 SP500 Sales 10 yrs Ago

Negative sentiment on the dollar becoming extreme

One of the most notable trends in markets recently has been the weakness in the US dollar. After a choppy strengthening trend since early 2018 (as the Fed was tightening policy), the US Dollar Index surged in the immediate aftermath of COVID-19’s arrival in March. Since then, however, as monetary and fiscal stimulus engulfed markets and investor risk appetite returned, the dollar has been weakening versus a number of other currencies. Indeed, the dollar’s weakness has accelerated recently, and the Dollar Index has reached its lowest levels since May 2018.

The latest movement is in large part attributable to strength in the euro, which has a big (58%) weight in the Dollar Index among the six major developed market currencies in the index. However, the recent decline can also be seen to a lesser degree in the Fed’s Broad Dollar index that encompasses a wider range of currencies. Certainly the prospect of US interest rates across most of the yield curve being near zero for the foreseeable future makes the dollar less attractive now versus other currencies.

However, we are now seeing signs that bearishness towards the US dollar has become extreme, and such sentiment is likely correlated with broader trends in investor risk appetite.

When reviewing the data on sentiment toward the dollar, one key metric that has jumped out at us is shown in the chart below. It plots an average of the proportion of market commentators (strategists, newsletter writers, etc.) who are bullish on the US dollar as reported by Consensus Inc. and Market Vane (services which track investor sentiment). We can see that bullishness on the dollar has now plunged to its lowest levels in nearly a decade. And while sentiment can remain bullish or bearish for some time, we can clearly see where the heavy consensus view on the dollar is right now. It is thus more likely that the dollar’s decline is in its later stages rather than a newly developing trend.

Dollar Indices and Sentiment

Since the US dollar behaves as a “risk-off” currency (along with the Japanese yen and Swiss franc), selling the dollar is often a sign of risk-on behavior, and consistent with recent risk-on activity in equity and debt markets. Bullish sentiment toward stocks and bonds is also back to pre-COVID levels, so the dollar sentiment readings are consistent with those trends as well. With monetary and fiscal stimulus in the US fading now, the surge in the supply of US dollars is also likely to ease, and the US economy and inflation are likely to slow without additional stimulus. A reversal of the current lopsided sentiment trends would potentially be bullish for the US dollar and bearish for equities, though the precise timing of any such change is always a challenge.