Rethinking The Surging US Dollar

Rethinking The Surging US Dollar

By: Guy Adami, Director, Advisor Advocacy
Published October 12, 2016

Despite yesterday’s sell off in the S&P 500, we still find ourselves a mere 2% off the all-time high of 2,193.81 made on August 15th. To the casual observer, everything is fine and this is just a very minor blip in what has been a historic market rally. Truth be told, that might in fact be the case. With a few exceptions, the bull thesis has not been challenged in a meaningful way, since the 667 low made in March of 2009.

But since I was raised in the “what can go wrong, will go wrong” Wall Street of the late 80’s, a few things need to be pointed out. The U.S. dollar continues to strengthen in a meaningful way, most notably against the euro. Again, to the casual observer this would be considered a great turn of events. A stronger dollar, both in practice and in theory, is great for the consumer as their buying power is enhanced. To the extent that a government agency can speak about the dollar, they will all publicly say that a strong US dollar is in everyone’s best interest. Privately, they are singing another tune.

You see, a strong U.S. dollar poses a serious threat to the earnings of every single U.S. company doing business outside of our borders. If you would like to see what this could potentially mean for stocks, I encourage you to pull up the charts of PPG Industries (PPG), Honeywell International (HON), Dover Corporation (DOV), and to a lesser extent United Technologies (UTX). I am not suggesting these are collectively the canary in the coal mine, but they cannot be dismissed as one offs or company specific events.

In addition, although I remain bullish on the U.S. bond market, the rise in rates we have been seeing not only here at home, but around the world, is also a bit alarming. Now don’t get me wrong, rates rising for the right reasons, i.e. strong economic growth, is a great thing. However, rates rising in an environment of slowing global growth is exactly what central bankers fear and many economists have predicted.

Personally, among the many fears I have had, the largest continues to be the markets blind faith in the ability of central banks to navigate these uncharted waters. Having been born late in 1963, and therefore a child of the 70’s, I can say with great confidence the following statement. Blind Faith was a great band, but it’s a terrible way to live life.