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The Dollar’s Ripple Effect

In technical analysis, “intermarket analysis” looks at the way in which various markets interact. Intermarket analysis primarily looks at four maret sectors: currencies, commodities, bonds, and stocks. From a technical analyst’s perspective, focusing our attention on only one market without considering what’s happening in the others leaves us in danger of missing vital directional clues and potential profits. The dollar, which has appreciated 24.4% since June 30, 2014 (as of March 19, 2015), has had an unusually strong intermarket effect of late. Today, we look at the dollar’s recent impact on other major markets and what it means for investors froma technical perspective. Since June 2014, a strong U.S. dollar has created a tailwind for European equities, while creating headwinds for the euro and commodities, especially crude oil, as well as equity markets for commodity-exporting emerging market countries such as Brazil. (To read about the dollar’s impact on domestic equity markets, see the March 16, 2015, Weekly Market Commentary, “Dollar Strength Is a Symptom Not a Cause.”)

THE DOLLAR’S RIPPLE EFFECT

 

Dollar Strength is a Symptom Not a Cause

The massive U.S. dollar rally has wide-ranging impacts. It hurts international stock returns generated in foreign currencies. It influences global trade and the flow of investment dollars. A strong dollar hurts corporate earnings by reducing revenue earned by U.S.-based multinationals overseas in foreign currencies. It even puts downward pressure on inflation and commodity prices (including oil) and can influence monetary policy, corporate profit margins, and consumer spending. These are important considerations, but the key question investors are asking is whether the strong dollar will derail the bull market. We don’t think so, based on how stocks have done historically during strong dollar periods. But the dollar does have important implications for asset classes and sectors, as we discuss below…

Dollar Strength is a Symptom Not a Cause

Happy Birthday Bull Market

The current bull market, one of the most powerful in the S&P 500’s history, celebrates its sixth birthday today, March 9, 2015. The S&P 500 has more than tripled since the financial crisis closing low on March 9, 2009 (the index is up 206% since then), achieving a cumulative return, including dividends, of 244% (22.8% annualized). Since World War II, just three other bull markets have reached their sixth birthday, and only one (1982–1987) produced bigger gains ahead of its sixth birthday. We do not think this bull market is about to end just because it’s six years old. Bull markets do not die of old age, they die of excesses, and we do not see evidence today that economic excesses are emerging. There is still slack in labor markets despite healthy job growth in recent months. The credit markets reflect rational behavior. We see few signs of overbuilding in the commercial and residential real estate markets. Inflation (with or without the effects of depressed energy prices) remains low, which has enabled the Federal Reserve (Fed) to remain accommodative. The accommodative Fed provides further evidence of the absence of the types of excesses that have marked prior stock market peaks….

Happy Birthday Bull Market

Are Expectations Too High?

Thanks to some help from the Greece agreement reached Friday afternoon (February 20, 2015), the S&P 500 and Dow Jones Industrials Average ended last week at new record highs, while the NASDAQ has moved to within 50 points of the 5000 milestone. The market’s continued ascent has caused some to ask if the stock market reflects excessive optimism. One way to respond to that question is to look at valuations. On both trailing earnings and forward earnings estimates, we believe price-to-earnings (PE) ratios — both between 17 and 18 — are slightly rich, but not high enough for us to change our positive outlook for U.S. stocks for 2015. (For more on our 2015 stock market forecasts, please see our Outlook 2015: In Transit publication.) Another way to gauge optimism is to look at market surveys, such as the percentage of bulls from the American Association of Individual Investors (AAII), which at 72% is only slightly above the long-term average range of 60 – 65% and not excessively optimistic. Finally, earnings and economic surprises also indicate that investor expectations remain reasonable…..

Are Expectations Too High?

 

Energy Sector Outlook: What We Are Watching

No sector is getting more attention right now than energy. Market participants are attracted to the potential upside after both oil and the energy sector suffered substantial declines in recent months. Many see the sector as cheap, something that is not easy to find these days in the U.S. equity market. We drive by gas stations every day where we see prices have been cut in half, serving as a constant reminder of how cheap oil is. In this commentary, we discuss what we are watching to assess the opportunity in energy….

Energy Sector Outlook What We Are Watching

EARNINGS SEASON HIGHLIGHTS AND LOWLIGHTS

Despite the massive drag from the energy sector and the negative impact of a strong U.S. dollar, fourth quarter 2014 earnings are on track to exceed the prior Thomson-tracked consensus estimate of 4.2% (as of quarter end on December 31, 2014). In fact, despite a slow start, earnings growth for the quarter (after all 500 companies have reported) should approach 7%, reaching the average
historical upside surprise of 3%. As of February 6, 2015, with about two-thirds of S&P 500 companies having reported, S&P 500 earnings were on track for a 6.4% year-over-year increase for the quarter according to Thomson. In this commentary we look at some of the highlights and lowlights of this earnings season as it enters the home stretch.

HIGHLIGHTS
Industrials defying skeptics. The industrials sector had many skeptics coming into this earnings season. The sector is one of the most global and was expected to see among the biggest negative currency impacts, both in terms of translation of foreign profits and pricier U.S. exports (a strong dollar makes imports more expensive for foreign buyers). A significant portion of energy capital spending flows to the sector, so reductions in oil exploration and production investment have negatively impacted the industrials sector. Lackluster economic growth in Europe and slowing growth in China add to the challenges. But strength in North America and expanding profit margins helped offset the drags, and industrials are on pace for 12% earnings growth in the quarter, 2% above prior expectations as of quarter end. Although guidance has led to estimate reductions, as it often does for all sectors, 2015 estimates are still calling for a solid 7% earnings gain compared with
2014. Our industrials sector outlook remains positive. Technology producing big upside surprise. The technology sector is on pace for a solid 17% year-over-year gain in fourth quarter earnings, nearly double the prior 9% expectation, representing the biggest upside surprise among all 10 equity….

Earnings Season Highlights 2015.2.10

DON’T FRET ABOUT JANUARY EFFECT

The stock market declined in January 2015, causing some to ask whether the so-called January effect (or what some call the January barometer) meansthat stocks will fall this year. One of the best known Wall Street adages, “as  January goes, so goes the year,” has a good track record when January is positive, but it is mixed otherwise. Although we always put fundamentals first in trying to forecast market direction, in this commentary we look at January market patterns and posit that the January dip may not be a reason to fret about the stock market in 2015. The so-called January effect, or January barometer, has a strong track record in that positive Januaries for the S&P 500 have preceded positive years 90% of the time since 1950, with an average calendar year gain of 16.9%.

MIXED TRACK RECORD FOR JANUARY EFFECT

The so-called January effect, or January barometer, has a strong track record in that positive Januaries for the S&P 500 have preceded positive years 90% of the timesince 1950, with an average calendar year gain of 16.9%…..

 Dont Fret About January

NO DEFLATING THE U.S. DOLLAR

Unlike the footballs that the New England Patriots used in the AFC Championship game against the Indianapolis Colts, the U.S. dollar has remained well inflated. The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015. The latest leg up has been driven by anticipation and arrival of quantitative easing (QE) by the European Central Bank (ECB). Bold stimulus from the ECB, and other central banks around the world including the Bank of Japan, has put substantial downward pressure on the euro, the yen, and other currencies, while boosting the dollar. In general, more supply of a currency drives down its value. In this week’s commentary, we discuss some of the causes of the strong U.S. dollar and some of the most important implications for investors.  The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015….

NO DEFLATING THE U.S. DOLLAR

 

EUROPEAN HEAD FAKE?

The European Central Bank (ECB) is likely to announce a quantitative easing (QE) program involving European sovereign bond purchases at its upcoming policy meeting on January 22, 2015. Recall back in September of 2014, in our two-part Weekly Market Commentary “Don’t Fight the ECB?” we highlighted several reasons for favoring U.S. equities and largely avoiding European equities,despite the ECB’s prior stimulus efforts and potential for outright QE. With QE likely forthcoming, we revisit the opportunity in Europe, which we believe may be setting the stage for a head fake. WHAT WE ARE WATCHING As we evaluate the opportunity in European equities, here is what we are watching:. Economic growth, Inflation. Earnings, Valuations, Loan growth, Relative strength. Economic growth gap between the U.S. and Europe is widening. The U.S. economy has been growing faster than Europe in….

European Head Fake?

Want to be happy and successful?

To save you decades of life or hours of research paper reading, what is the best way to think about your life and time if you want to be happy and successful? Have a very positive and nostalgic view of your past, be balanced in your enjoyment of today and planning for tomorrow, and absolutely avoid a negative view of your past and a fatalistic view of the present. Some of this is common sense to successful people, bad attitudes and a lack of planning result in bad outcomes, but what about this past stuff? I have discovered that it’s not so much our past as our view of our own past that has a huge impact on the present and future. Family members with nearly identical life experiences can have very different views of their past and as a result, very different life satisfaction. Of course, there is no doubt that some aspect of our past-view is colored by our outcomes, so that people with unhappy lives connect the causal dots to unhappy past events. But I firmly believe that in order to be happy and broadly successful in all areas of our lives, we need to view our past as a series of events that lead to a positive and happy life. Said another way, as we write the unfolding story of our lives we have the power to choose the chapter titles, to select the turning points and the shaping factors that best explain a happy and successful present and future, and in so doing, make our lives a story worth living. – Michael W. Boone, CFP, CFA

 

*Albright, Robert and John McDermott. 2015. “Time Perspective and the Practice of Financial Planning.” Journal of Financial Planning 28 (1): 46–52.