Bonds Top First, Then Stocks, Then Commodities

Bonds topped in 2020, stocks haven't topped yet, and commodities appear to be just finding their footing here...

Traveling for a while with my family, I have been struck by a couple of things.

One, Europe is cheap, once you get outside the major cities.

Why is this?

Part of it, in my opinion, is Europeans haven’t had the rampant asset inflation, particularly in the stock markets, that we have had in the United States, though, it can be argued that the European markets (Asian markets took, look at South Korea EWY 0.00%↑ ), including the long left for dead bank stocks, are waking up a bit here. In fact, Deutsche Bank DB 0.00%↑ is up 83.2% for the year, Banco Santander SAN 0.00%↑ is up 87.8%, and Barclays BCS 0.00%↑ is up 40.9% through Friday, to list three examples.

Financials, both in the U.S., and outside of the U.S. were prominent targets of our contrarian research, going back all the way to 2018.

It took awhile, however we have seen surges in stocks like Wells Fargo WFC 0.00%↑ and Citigroup C 0.00%↑ the last couple of years, with both of these stocks doubling from their 2023 lows.

Looking back, we had a top in the bond market in 2020.

The resulting normalization of the yield curve, with a significant steepening of the global yield curves the past year, has resulted in a turbo-charged boost to financial shares, particularly in international developed markets and in emerging markets.

With financial surging to life, this has helped propel global stock markets, which are generally at new highs.

In summary, bonds topped in 2020, and have been in a five year cyclical bear market after a 40 year plus structural plus market. Stocks haven’t topped yet, and commodities are just now springing to life.

Remember the phrase that I like to quote, which is bonds top first, then stocks, then commodities.

Keep that in mind in the years ahead here.

Given that, where is the opportunity in stocks today.?

With financials starting to roar to life, one area of the market that still screams relative opportunity is small-caps and mid-caps, particularly small-cap value.

On that note, let’s dig in.