But I am ahead of myself. So let’s first look at weekly chart of the Dollar Index (black line) versus S&P500 (blue line). See figure 1. For much of the late 1990’s, stocks and the Dollar Index traveled together. These where the days when a strong Dollar and a strong economy and a strong stock market went hand and hand. This was prior to point 1 on the chart. At point 1, the historic multi-decade bull run for equities was over, and several years later at point 2 the US Dollar Index topped out as well. Both asset classes fell together and then equities bottomed at point 3. The Dollar Index continued lower for another 2 years finding a bottom at point 4. From the bottom in equities at point 3 in October, 2002 to the bottom in the Dollar at point 3 in December, 2004, the S&P500 gained 50%!!
So think about this for a minute: if the Dollar continues in a down trend, there is a high likelihood of large losses and these losses should occur over the next year. This will likely keep a bid under equities for longer than most of us are expecting. Commodities will also be strong and should outperform equities. Let’s add a third symbol to figure 1, and this is the CRB Futures Index (gold line). What we see and what we know is that in a falling Dollar environment, commodities will outperform. See figure 4. Equities will be hampered by real or perceived inflationary pressures as trends in commodities and long term Treasury yields rise. Equities will move higher in a falling Dollar environment, but their ascent should be a lot choppier. Furthermore, without real organic growth -marked by job creation and wage inflation and consumer spending outside of government subsidies- any economic recovery will always be questioned for its sustainability.
No comments:
Post a Comment