Easy To Blame The Dollar
During the May 26 selloff in stocks, we heard numerous "blame it on the strong
dollar" comments similar to the one below via CNBC:
"I think the pressure today is coming from the stronger dollar," said
Peter Cardillo, chief market economist at Rockwell Global Capital. "The
focus this week is the yield curve and the stronger dollar."
Stocks Gained Over 70% With Strong Greenback
While the value of the U.S. dollar impacts countless areas in the global economy,
a logical question is how concerned should equity investors be about a strong
dollar? As shown in the chart below, the S&P 500 gained over 70% during
a period of U.S. dollar strength between 1982 and 1984. Therefore, taken in
isolation, a strong dollar is not a reason to cash in your stock portfolio.
A Bigger Concern Is The Length Of The Bull Run
Regardless of the dollar's impact, there are three reasons telling investors
now is a good time to water test their portfolio for the next inevitable bear
market:
- The bull market is quite mature in historical terms.
- Bear markets can wipe out gains quickly.
- A new and different landscape may be emerging as interest rates come off
of multi-decade lows.
Back To History And The Dollar
Can we find another period in recent history when stocks and the U.S. dollar
rose simultaneously? Sure we can - as shown below, the S&P 500 nearly tripled
in value between 1995 and early 2000. Over the same period, the U.S. dollar
surged over 25%.
Investment Implications - The Weight Of The Evidence
Tuesday's big drop in stocks did not constitute a material change to the hard
evidence when viewed on our investment time horizon.
With a big GDP number coming Friday, it is important to remain flexible and
open-minded. The market will guide us if we are willing to listen.
