A great time in the markets for bulls in November. We wrote about it back in
October, predicting that bulls might get the upper hand in the last few months of
the year. Risk assets have been catching a bid all over the place, from stocks
to crypto, while the vast majority have been hesitant about the rally. Excuses
about a shrinking FED balance sheet to overtightening by central banks have
been prevalent. All great stories, but the fact is the market doesn't really
care about it. If we take a look at the facts: what is price doing? On my
computer screen, it's going up.
Now, the title gives it away a bit, but yes, the dollar declining is a good
reason to be long in this market. First of all, the US tech sector brings in
quite the revenue from overseas. According to Goldman Sachs, it's upwards of
55 percent. High-interest rates were the primary reason tech stocks tanked,
but the strength of the dollar became an issue when converting foreign
currencies as well. However, now the dollar has pulled back quite a bit, and
tech has been a big beneficiary, easing pressures.
Why focus on tech and the USD here? Well, you can't deny that the backbone of
the US economy is technology. It's quite obvious, and when the backbone of the
economy performs well, it takes the rest with it. This won't last, though,
because if the dollar weakens further, it could hamper future growth. But for
now, we're in a negatively correlated environment between the dollar and the
stock market, and we need to make use of it while it lasts. Take a look at the
chart below.
Take a look at the chart below of the S&P 500 and the inverted dollar index. We're going
to assume this negatively correlated relationship lasts for a while longer.
Another benefit here of the weaker dollar is the comeuppance of emerging
markets, which is, in fact, an important part of whether we're back in an
early-stage bull market.
We've written about small-caps before
here. So, a real bull market is accompanied by small-caps, whether you like it or
not; it's a fact. We know a weak dollar will benefit emerging markets.
Investors will start looking for foreign stocks in Asia, South America,... you
name it. Most foreign stocks are small-caps; they're in the early stages of
growth, especially compared to the giants that are FAANG. So when we see
emerging markets do well, it means speculators are starting to search for more
risk. We really start to look towards the possibility that an early-stage bull
market might be forming once this happens. Take a look at the chart below;
emerging markets are usually the riskiest assets someone can own and will
start to show strength (and weakness) first in the global landscape.
So, basically, you need to ignore those thousands of negative fundamental
biases and just follow what's in front of you, which for now is that a
continued weakening of the dollar will, for the time being, be a positive
influence on the stock market. What are your thoughts? I love to hear from
readers about their opinions on the current state of the financial markets. You can leave a comment
below or write to me using the
contact form.