Dollar Doldrums Don’t Mean Diddly for Stocks

Story Notes:

• Recent headlines have renewed worries over the falling dollar, but stocks aren't fazed
• Additionally, the notion that gold is a hedge against an "uncertain" market is bogus
• In reality, neither the dollar's drop nor gold's rise will curtail the bull market in stocks

In the face of this flummoxing stock rally, once again the overly dour media finds itself latching on to a gloomy headline of last resort—the peril of the falling dollar and the safety of gold. (The media's list of dismal stories of last resort is familiar to MarketMinder readers: Inane US savings statistics, trade and budget deficits, consumer spending, and many more!) For example:

Gold, Again, Becomes a Shield Against the Unknown
By Conrad De Aenlle, The New York Times
https://www.nytimes.com/2007/09/23/business/yourmoney/23gold.html?ref=business

What does this even mean? You should always buy gold when the future is uncertain? Were that true, no one would invest in anything—ever—except gold because the future is always uncertain!

The really perverse part about today's headlines? Gold is behaving opposite to what most would commonly expect—it's somewhat positively correlated to stock price movements in recent years. Just in the last week, when gold spiked, so did stock prices. This relationship has held true for much of the last few years. So much for a "shield against the unknown," as it were. Now take a look at this one:

U.S. Dollar Goes the Way of Monopoly Money
By Igor Greenwald, SmartMoney
https://www.smartmoney.com/invisiblehand/index.cfm?story=20070925

Back in July, we wrote a commentary entitled "The Only Dollar Story" (7/9/07), where we said the only really interesting story about the US dollar this year has been its weakness to the Canadian dollar. Read more about it here:

As Dollar Dips, Canada Exploits Lucrative Loonie
By David Cho, The Washington Post
https://www.washingtonpost.com/wp-dyn/content/article/2007/09/25/AR2007092502160.html?nav=hcmoduletmv

Despite media claptrap, not much has changed. The dollar is weaker this year by 5.2% against a basket of major foreign currencies. That just isn't a very big drop. Similar currency moves happen very frequently and in far greater magnitude and it's all quite normal.

We note the dollar was weak periodically through the current bull market, and stocks performed quite well. In 2005 the dollar was up and stocks were up; in 2006 the dollar was down and stocks were up again. Go figure!

While it is true dollar weakness to the tune of 16% to the Canadian loonie is notable, particularly since we do a lot of trade with Canada (think oil and natural gas imports), the story isn't exactly spooking stocks. The dollar began its recent mini-slide at just about the same time stocks started rallying after the Fed's rate cut a week ago. Since then the S&P 500 pulled within a few percent of its all-time highs.

Gold or greenbacks, the conclusion remains the same: Neither will sink stocks. Similarly, housing woes (another overly dour media story of last resort) is proving just as ineffective in shirking the bull. That's probably because these stories are old news and fully reflected in stock prices by now; they lack the surprise power to move the market looking forward.

The notion the dollar must be "on top" or it spells doom for the US economy and stocks is a myth. Currencies fluctuate, and often. Currency movements (especially in the medium to long term) don't make much difference to a well-diversified global portfolio and aren't worth predicating a stock forecast on.

Sources: Datastream, Bloomberg. Dollar performance measured against a basket of currencies weighted against the MSCI EAFE index.