What Is the Sentiment on the U.S. Economy? Three Intermarket Indicators
What is the current sentiment toward the state of the U.S. economy? And are the recent moves in the stock market driven by improving economic expectations, or are they merely signs of “complacency”? These are some of the questions investors are asking themselves these days. Let’s try to explore this by using some intermarket analysis tools.
A first insight can be gained by comparing the performance of gold versus that of the U.S. dollar. We use futures for gold bullion and the Dollar Index. In general, a declining ratio can indicate a preference for the dollar over gold—something often associated with greater confidence in the U.S. economy. However, the chart shown above displays a clear preference for gold, although over the past month the indicator appears to have plateaued.
Another interesting element to investigate is the performance of Small Caps relative to Big Caps. Small Caps are more sensitive to the U.S. domestic economy. If they outperform, it indicates confidence in the American economic cycle. If they underperform, it may reflect uncertainty or perceived risk. In this case as well, the indicator (see chart above) suggests a clear trend in favor of Big Caps, in a chart that appears to mirror the one previously discussed.
Finally, it’s worth evaluating how equity risk is perceived compared to bond market risk. To do this, we can use two indicators: the VIX and the MOVE. A low VIX relative to the MOVE may indicate an underestimation of equity risk compared to bond risk. This could be a signal of complacency or excessive confidence in the equity market. Here, the indicator does not seem to suggest any major imbalances, but it is worth noting that since April the trend has been clearly downward, indicating a stronger rise in the MOVE compared to the VIX.
