The Strong Dollar’s Effects on the Market

The Dollar’s Feeling Strong as an Ox

If this dollar’s a rockin’, don’t come a knockin’.

The greenback is on a big-time roll, with the benchmark U.S. Dollar Index ETF, the PowerShares DB US Dollar Bullish (UUP), up nearly 10.5% in 2015. During the past six months, the dollar is up 18% vs. a basket of rival foreign currencies. During the past 12 months, the dollar’s value has soared about 25% against the combined euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

If you’re going long in the U.S. dollar, then good job! You’ve made money, and you are probably going to keep making money, as the buck is likely destined to reach parity with the second-most-prominent currency in the world, the euro.

In fact, the dollar now is trading at 12-year highs vs. the euro. While that’s good for consumers who buy European goods, it’s not so good for U.S. companies that export to the Old World.

Because of the currency’s strength, the dollar is starting to hurt corporate bottom lines — and especially the bottom lines of multi-national companies that get a lot of their revenue from exports.

In fact, I think there is the potential for an earnings recession due to the rising value of the dollar, meaning we could see back-to-back quarters of weaker or negative earnings growth. This situation does not mean to expect a new bear market, but it does point to a correction in U.S. stocks.

This week, we saw the first rumblings of a correction, as the market reacted with a lot of volatility to the surge in the dollar and the growing likelihood of the first Fed rate hike in years.

Stocks now have dipped below their 50-day moving average. Though the S&P 500 Index remains well above long-term support at the 200-day moving average, there has been a decided drop in March that reflects growing fears that this six-year-old bull market is getting really tired.

The bottom line here is that as long as the dollar is feeling strong as an ox, the major market indices might just stay plowed for some time.

Preparing for the Bear?

The bull market just turned six years old, and like most six-year-olds, it’s impetuous and subject to a lot of growing pains.

For stocks, and for investors, what this means is that we are likely to see a lot more volatility, and a lot more uncertainty, than anytime since the 2008 market meltdown.

The ending of quantitative easing by the Fed, the likelihood of the first rate hike in years happening in either June or September and the renewed strength in the U.S. dollar all have the potential to change the investing landscape.

Does this mean a new bear market is on the way?

It’s too soon to say that; however, it’s never too soon to prepare for the worst.

My father, Dick Fabian, used to say that investors can live with lost opportunity a lot easier than they can live with lost money. That slice of homespun wisdom is something I completely agree with, and it’s a big part of the Fabian approach to investing.

Keep this notion in mind now that the bull market just turned six years old. Because bull markets always end. And, when they end, you don’t want to be caught unprepared.

If you want to find out how our trend-following approach to markets has helped investors protect and grow their capital for the past 38 years, then check out my Successful ETF Investing newsletter today!

Springsteen Thoughts

“For an adult, the world is constantly trying to clamp down on itself. Routine, responsibility, decay of institutions, corruption: this is all the world closing in.”

— Bruce Springsteen

The singer/songwriter and music icon has a lot of wisdom flowing through his lyrics. But in the above quote, Bruce Springsteen reminds us that if we’re not careful, the world can close in on us fast. Don’t let this happen to you. Stay alert, stay positive — and don’t let yourself slide into decay.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about the relationship between stocks, bonds and the dollar. I also invite you to comment in the space provided below.