A weak stock market will not be rescued by a strong dollar this time. Yes, Europe, Japan and the UK have lower yields and a much worse economic outlook at the moment, but it’s unlikely that asset managers there will inject money into the US stock market for much longer. There is no near-term bottom yet.
“What’s the pain point for the Fed here? We’re at 3659 in the S&P 500 and we think it could go to 2800, although I don’t want to be too harsh,” says Vladimir Signorelli, president of Bretton Woods Research, a research firm. It is a great investment in nature. “There’s another 20% drop in the field for sure,” he says.
With currencies weakening in other major economies, it becomes more expensive to buy dollars for foreign asset managers.
However, where else would they get 4% on a one-year Treasury bill? Putting money in Treasurys will still be a safe investment. But that won’t really help the stock market unless there’s a pivot from Jerome Powell at the Fed. Stocks hate high interest rates. The consensus at the Beltway now is that stagnation is the best way to fight inflation, and that’s what America gets.
Wall Street Journal editorials said Thursday that a strong dollar – or more accurately, a rapidly volatile dollar – is a growing economic threat.
For now, the Fed may help bring down inflation by lowering the dollar prices Americans pay for imports, especially energy. But US companies will soon find the dollar value of their foreign earnings shrink. Meanwhile, weak currencies are exacerbating inflation in America’s most important trading partners,” the Wall Street Journal editorial board wrote. “If you think the eurozone energy crisis is bad right now, see what happens the longer they need to import energy in 99 cents euros. .”
The United States is in a better position than Europe. But the Federal Reserve’s GDP tracker in Atlanta lowered its forecast for third-quarter GDP to just 0.3%, down from a previous forecast of 2% in midsummer. The economy is weakening. A strong dollar did nothing for the US economy.
“The raging dollar is negative for global risk assets, including those in the United States,” says Brian McCarthy, president of Macrolens. It is putting enormous pressure on dollar debtors around the world, particularly in emerging markets. The Fed is on a path that eventually leads to a credit crunch. It takes time because we have come out of the pandemic with very high levels of nominal growth. But the interest rate path they laid out at Wednesday’s meeting is a sure-fire recipe for global financial stress, he says. His Friday note to clients says it all: “The next meltdown.”
Brendan Ahern, chief information officer at KraneShares, says the Fed’s rate hike is making the dollar a “wrecking ball”. High interest rates in the US mean that countries like Japan and those in Europe are drawn to buying US bonds, which certainly pay more than the 1.5% one gets in Europe. This draws money from global stocks into Treasuries or cash.
Over the past three months, emerging market investments have lost more than $10 billion in redemptions. Funds focused on Europe are much worse. They lost nearly $40 billion. Meanwhile, US equity funds saw $15 billion in inflows, partly due to inflows from Europe.
But how long can that last? Almost everyone on Wall Street is now betting on a recession. Last week, Vanguard gave the odds of a recession above 60%.
“Stock sentiment is weak, and prices really seem to be slowing,” says Mark Heffel, CIO at UBS Global Wealth Management. “We are still investors, but we are selective. Focus on defense, income, value … and security.”
Crude oil markets are also pricing in a slower economy, falling 5.5% on Friday just before the close. American automakers, Ford, General Motors, and Tesla
Meanwhile, dollar futures are up 1.6%, indicating that there is no end in sight for the dollar’s rally.