Here we are in the 4th quarter of 2009 with financial picture neither predicted nor predictable. In fact most people thought the S&P would end the year at $975- it’s now at $1,110.
OBSESSED WITH THE DOLLAR
Normally the stock market’s focus is on what’s happening with the economy and various companies: who’s making money, who’s not and how confident we are feeling about the future. Right now, however, Wall Street stock traders are obsessing over the U.S. dollar, according to Adam Shell in an article entitled “Dollar becomes focus of many investors’ strategy; here’s why,” in USA Today. This is because, as things stand now, the market is being driven up (the Dow has gone from 10,000 to 10,400), solely on a weak dollar. And the dollar is weak because interest rates (Fed Fund rates, money market rates) have come down.
WHAT A FALLING DOLLAR MEANS
The big debate has always asked, is a falling dollar good for the U.S.? It certainly signifies a weak currency/economy but its’ falling also helps spur export growth.
A falling dollar makes it more attractive to buy companies with international exposure. It makes it more attractive for foreign companies to buy here in the U.S. All of which means that the good news from this crisis has been a steady decline in the current account deficit as exports have been outpacing imports during the past year, according to a Charles Schwab report. So a weak dollar is spurring export growth – not a bad thing. It’s just that we would rather see the market moving up on a strong dollar and a strong economy.
ALL IS WELL?
While we are all cheerful that the market is moving up, we need to remember that the dollar alone will not carry this market higher. One of the ways we measure the health of a market rally is by looking at the volume. Volume tells us how many people are participating and, from what I’ve seen, this rally is not that impressive. In fact we believe the market is currently overbought (the price has gone up too quickly and is not sustainable) and we are leaving some cash on hand incase of a correction.
THOUGHTS FOR THE FUTURE
Are we in a bubble and headed for inflation with the market going up, and the dollar going down? Experts do not think so. The same Charles Schwab report notes that with constraints on wages and rents and low pricing power they believe near term inflation will be contained. No dollar crash is predicted – just a continuation of a gradual longer-term trend (the dollar has been in longer-term secular decline since 2002.)
For those of you with questions, feel free to call me at 203.966.2712.
This information is copyrighted October 2009
*Please pass along this newsletter to friends and family*
to spread the word!