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Home>UPDATE: Why stock market records may just be a mirage caused by dollar weakness

UPDATE: Why stock market records may just be a mirage caused by dollar weakness

UPDATE: Why stock market records may just be a mirage caused by dollar weakness

10/04/2017

By Ryan Vlastelica

Adjusting for dollar weakness, Wall Street's rally looks a lot less impressive

The U.S. stock market has hit dozens of all-time highs in 2017, but that run may be obscuring a factor that has Wall Street's rally looking less impressive from an outside perspective.

Stocks have gained for a number of reasons this year, including a strong second-quarter earnings season, improving economic data, and prospect for tax cuts, which if enacted is expected to be beneficial for corporate profits and share prices.

Those are all obvious tailwinds, but another major factor has a more complicated relationship with the economic environment. The U.S. dollar has trended lower throughout the year, down 8.6% in what could be its biggest annual decline since 2003. A weak dollar tends to benefit stocks, especially large multinational companies, which see their profits erode in periods of dollar strength due to currency headwinds. Such global stocks, including Apple (AAPL) and Boeing (BA), have been among the market's leaders so far this year.

The dollar's weakness in 2017 could mean that Wall Street's records are just "a domestic perception," according to Robert Michaud, chief investment officer at New Frontier Advisors.

"While the market has risen year-to-date, the dollar has fallen relative to other currencies. Therefore, international investors may not perceive the U.S. at a market high," he wrote in a research report. He added that on a dollar-adjusted basis, the S&P 500 was "significantly below" a high hit in the first quarter of the year, even as the unadjusted benchmark has trended higher.

"From a purchasing power perspective, the U.S. stock market peaked at the beginning of March," Michaud wrote. "This calls into question how much of the recent rise of the stock market is associated with expectations of future growth and the health of the economy. The global economy is not valuing the U.S. equity market as much as the market high would suggest."

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