The dollar is getting stronger
It was a pretty quiet stock market week, though it was definitely active in the currency and energy sectors. The dollar continued to rise while energy prices are dropping. (The AAA recently said that the average price for gasoline fell to a seven-month low.)
We did see continued strength in the overall economy with the Conference Board reporting that consumer sentiment now at its highest level since 2008. Further, by way of supporting data, the Job Opening and Labor Turnover Survey (JOLTS) showed a spike in job openings and an increase in the “quit rate.” Existing home sales and housing starts rose. The Institute for Supply Management’s (ISM) Manufacturing Index rose to its best reading since March 2011. The new orders component of the Index jumped; a good indicator of future growth.
Investor attitudes are powerful drivers – up and down – of the markets, so the continuing flow of positive news is starting to actually have an effect on the still prevalent squishy investing beliefs out there. Seems we could see the consumer kick even more in to the economic expansion as a result of these new and improving attitudes.
The strong buck
I wrote last week about the weakness in gold. One of the major reasons for that is the increasingly strong dollar, as all major global commodities are traded in US dollars. Those prices tend to move opposite to the dollar, as in dollar strong, commods weak. In addition to demand drops and increasing supplies, this is why energy prices have been moving lower.
So, why the dollar strength now and what does it mean for an investor?
Primarily, I think it’s important to understand that a rising dollar is usually the result of good news. As noted above, people are becoming more optimistic about the US economy. In addition, the Russian / European challenges could be part of the strength as the so-called flight to safety can have global investors seeking out the dollar. Also, the prospect of soon-to-be rising interest rates has likely added to the strength.
If you have been or will soon be traveling overseas, the (positive) difference in buying power will be to your benefit.
One downside is, if you have positions in energy production companies or energy ETFs, you’ve seen your shares underperform pretty significantly so far this year. Check ExxonMobil and Chevron, both in the Dow, as examples of how their share prices have done v. those of Apple, Microsoft and Facebook, for instance. Definite examples of how the strong dollar has affected oil prices.
Another less positive consideration is that the good, stronger dollar can also have an effect on imports, causing them to be weaker overall as their relative prices go up. So, get the cool foreign car of your choice now…
Euro-deflation
The Europeans are having a hard time getting an across-the-board recovery going in the ‘Zone. Having a group of individual countries willing to set aside their domestic interests and goals for the “greater glory” of the ‘Zone is pretty tough. The European Central Bank (ECB), headed by Mario Draghi, doesn’t have the overall authority in Europe as does the Fed here. Running an economy by consensus is pretty near impossible, in my mind.
Deflation refers to a broad-based decline in prices. You think, well, dropping prices can’t be bad, can they? Gives you more money for other stuff. Sort of. Because the amount of debt doesn’t change when prices and incomes fall, you then need more income to service that debt. This can then result in spending cuts. Additionally, once consumers and businesses believe prices will be lower in the future, they typically postpone spending since why pay more now? This, in turn, creates a negatively-reinforcing economic slowdown.
The Euros have belatedly started on their own easing program so we’ll have to see how long it takes for them to get back up to speed. And, by the way, according to Cornerstone Macro Research, roughly 20% of US company earnings come from the Eurozone so there can be some effect on our market due to any prolonged weakness.
Summary
Oil is a fear asset, gold is a fear asset, and they’re all coming down, so that’s very good.
A correction is always possible but I believe an improving US economy can help to support further gains in stocks. Use whatever pullbacks to either add to or initiate positions. Next week’s Fed announcement regarding interest rate timing could raise volatility, so be prepared for some bumps along the way.
Last, please don’t try to second-guess the foreign exchange market. It’s a tough market to trade – even if you’re in it consistently.
Cheers!
Mike
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