Why fear of a weak dollar is actually bullish
Being afraid of any false factor is always bullish
“The dollar’s too weak, eek, eek; Stocks at new highs, oh my!” — could make a great kiddie song. Tiny tots needn’t understand rhyming gibberish to love its feel — just like most market pundits.
It’s common hearing both narratives now: that a weak dollar is bad for stocks, and that notching new all-time market highs is scary. Both are wrong, silly — fit for 3-year-olds — and actually quite bullish. Here’s why:
Fear of any false factor is always bullish. When folks fear anything demonstrably un-bad, that fear is already priced into stocks — like depressing a spring. When nothing bad happens, the force reverses, releasing relief and upward price pressure. Always.
That principle applies perfectly here. We’ve a long history of stocks, new market highs and dollar wiggles. What happens next? Repeat after me: “They predict nothing.” Fear of them is silly but bullish. Let me show you.
First, on record highs: They’re so normal as to be un-newsworthy. During normal bull markets, we get dozens to hundreds. No right number exists. U.S. stocks set merely 46 in the 2002-2007 bull, 153 in the 1980s run and 347 in the 1990s. This time, as of Sept. 13, we’ve 222 and counting. So?
Only one ultimately matters — the final one — the peak. Which is it? No one ever really knows until far, far later. Bull markets don’t die of old age or from maxing out some fantasized pre-set allotment of new records. They expire
If a weak dollar were bad and a strong dollar good, then foreign and U.S. stocks would zigzag.
when investors run out of worries and reality can’t beat lofty expectations. Or when some huge, unforeseen negative, worth trillions of dollars, wallops everyone. But statistically we know “new highs” has nothing to do with it. Doesn’t predict.
In the 1990s bull, the 200th all-time high was on Oct. 18, 1996. Stocks then more than doubled before peaking in 2000. Even after the 300th new record, they climbed almost 33% before rolling over. Skipping out simply due to new highs risks missing big gains if stocks proceed normally.
Fretting the dollar is similarly silly. Hereto, a long history. Hereto, no predictive power. The dollar is weak or strong only relative to something else. Today’s dollar is “weak” because the pound, euro, yen and others are stronger. In the long run, they mostly even out. Stocks’ relationship to our currency is all over the map. We’ve had 43 calendar years since America ditched the gold standard, letting the buck ”float” freely against other currencies. Compared with a basket of major currencies weighted by how much we trade with them, the dollar rose in 21 and fell in 22. A coin flip. In those 22 weakening-dollar years, U.S. stocks rose 18 times and fell just four. Global stocks fared similarly, rising 17 times and falling five.
Does this imply a weak dollar is great for stocks? Nope. It just means stocks rise about 75% of the time. Were the 21 strong-dollar years better? Nope. U.S. stocks rose 17 times and fell four. Basically the same. And global stocks rose 16 times; fell five.
If a weak dollar were bad and a strong dollar good (or vice versa), then foreign and U.S. stocks would zigzag — U.S. up, foreign down (or vice versa). That doesn’t happen. We go the same direction foreign does, sometimes more, other times less, but not dollar driven. Believe it.
Yes, it’s possible we could be up
2% one year and foreign down
2%, but tiny spreads don’t matter because they really wouldn’t impact you. Most stocks respond to global market factors, with some variation for local economic, political and short-term sentiment trends. But we know the actual statistical linkage between the dollar and U.S. vs. non-U.S. stock wiggles shows zippo, nada.
So, rejoice that folks now fret these two phonies. When the real market peak finally comes, they won’t fret. That’s what to be on guard for, a lack of fear.