The US Dollar
With how strong stocks have been over the past few weeks, our focus again is on the US dollar. This time, however, we are looking at how other securities reacted to its mild pullback from former highs. Historically, investors turn to bonds as a flight to safety. Since bonds have been selling off with stocks as interest rates continued to rise since the Summer of 2020, investors instead attempted to de-risked their portfolios by stockpiling their stock sales into the US dollar. This means that any dollar weakness correlates to a heightened reaction from other risk assets, especially large international companies who also depend on a weakened dollar for their own balance sheets.
Since the dollar peaked on July 14, the S&P 500 and Nasdaq are up 7% and 8% respectively. All while the dollar index is only down about 3%. Energy, which has been the top performing sector this year, is up over 13% in the same time period, with the largest companies in the sector seeing the strongest buying pressure. The question now is whether the recent dollar weakness was simply a small pullback in an otherwise strong uptrend, or a signal of more weakness to come. Continued selling pressure on the US Dollar should amount to further buying in other risk assets and would likely repair some of the damage the market has endured since the beginning of the year. If the shallow selloff we just experienced is all we get, other risk assets will probably continue to struggle in the same price points they have failed to find buyers at for the past couple of months.
At the start of this week, the percentage of stocks making new highs finally perked up, signaling a drastic improvement in breadth compared to the trend we have seen all year. These breadth indicators are incredibly important in understanding what is really going on underneath the surface and act as clues to guide us as new trends begin forming. This is just one data point among many, but it does show just how important the US dollar strength has been to the weakness in the US stock market. If that strength continues to falter, we could be looking at a completely different market environment in the near future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The content is developed from sources believed to be providing accurate information.