What do we want to own?

That’s the question we ask ourselves every day. Stocks? Bonds? Commodities? Crypto? Cash? The answer doesn’t have to be like flipping a light switch. It’s not like we want to be all in on stocks on Monday, then all in on Treasurys by Tuesday afternoon. Instead, the answer to “What do we want to own?” evolves slowly over time. Our minds gradually change as new evidence comes in, and our decisions follow those slowly-formed opinions.

Stocks have been the place to be since last fall. There’s not much argument about that. In recent weeks, though, the tide seems to have turned in favor of other asset classes. Commodities are leading the way. Check out the ratio of the Invesco DB Commodity Fund (DBC) vs. the S&P 500 below. We’ve broken the downtrend line, momentum just reached overbought territory for the first time all year, and the ratio crossed above the 200-day moving average. It’s a bit early to definitively call this the start of a new uptrend, but at the very least, this year-long downtrend has weakened considerably.

We’re experiencing a bit of déjà vu this month.

It seems like we’ve traveled back in time to 2022, when only two things seemed to matter: interest rates and the US Dollar. Those familiar foes have returned to the fore of the investment landscape, pressuring stock prices along the way.

Each time interest rose last year, the S&P 500 fell. And each time rates offered a reprieve, stocks rallied in relief. Look at how closely the two moved together:

We keep waiting on silver to take a leadership role.

Prices for silver and gold tend to be highly correlated, but silver tends to move in greater magnitudes. As such, when precious metals are rising, we expect silver to outperform. That’s what we’ve typically seen during gold’s best runs. These days, silver refuses to lead.

Towards the end of last year, precious metals prices surged, with gold jumping from near $1600 to above $1800 by January. Similarly, silver jumped 30% from its October lows over that time. Gold prices continued to rise with the new year. Silver did not.

The Federal Reserve held rates constant at this month’s FOMC meeting, an unsurprising outcome after the latest CPI report showed price pressures continuing to moderate. The quarterly Summary of Economic Projections showed that the median Fed participant sees two more quarter-point hikes by year-end. That would imply a terminal rate of 5.50%- 5.75% for this cycle, and the highest Fed Funds rate in 20 years.

Jerome Powell spent this week reinforcing his view that more hikes are on the way, but the recent decision to not raise rates after doing so at every meeting for more than a year is a clear signal that this hiking cycle is nearing its end. Modest changes to the terminal rate aren’t the same as what happened in 2022, when the Fed went from talking about one 0.25% hike at year-end, to implementing the fastest tightening cycle in 40 years. Here’s a brief recap of the timeline for those that have blocked last year’s turmoil from their minds:

Of course, inflation could always surprise us by reaccelerating. (We aren’t economists, after all, and, even if we were, we’d probably be terrible at predicting the path of future activity. The latest GDP report proved that even predicting the past can be quite perilous.) If it does, the Fed may well respond by tightening policy to a level that no one expects.

For now, the market is discounting the likelihood of that scenario. Inflation was a problem for asset prices last year because higher inflation meant higher interest rates, and higher rates meant a stronger US Dollar. We shared with our subscribers many times an overlay of Treasury yields, the US Dollar Index, and the S&P 500 index, pointing to how tightly correlated the 3 were.

Once again, gold finds itself stuck below its former highs. Will the long-awaited breakout ever materialize?

Jerome Powell and his friends raised rates for a tenth consecutive meeting yesterday. That wasn’t a surprise. Neither was it surprising when Powell laid the groundwork for a pause in hikes, removing language from the prior meeting’s press release that indicated additional policy firming would be necessary, and replacing it with more flexible language that highlights the Fed’s data dependence going forward.

From 1990 to 1999, gold prices dropped by 40%. Over that same period, stock prices quadrupled. If Twitter was around back then, I bet the sentiment back then would look pretty similar to the kind of things we see and hear today: “Only old people and conspiracy theorists hold gold. Why would you hold a non-productive asset when you could own a piece of this high-flying growth stock or this new, disruptive technology?” And given the performance of gold vs. stocks over the last decade, who can blame them? Gold has gone absolutely nowhere since its 2011 peak. The S&P 500 has risen 250%.