was successfully added to your cart.

Tag

US Dollar Archives -

BREXIT Surprise: What Investors Hate More Than Uncertainty

By | 2016, Money Moxie, Newsletter | No Comments

“If you want to see the sunshine you have to weather the storm.” This advice from Frank Lane describes well the fortitude needed to invest successfully, especially in 2016.

This year began with two extremes: one of the worst starts ever for the stock market followed by a sharp reversal into positive territory. The second quarter gave us something completely different: calm—that is, until Britain’s exit vote from the European Union (BREXIT).

United Kingdom

Surprise!
Most experts did not expect the “exit side” to get 51 percent of the vote on June 23rd. This shocking outcome sent global stocks into a tailspin. After all, there is one thing investors hate more than uncertainty—surprise!

Then a reversal: Six days before the vote and six days after, the S&P 500 index was roughly equal.

We can’t dismiss this historical event completely. The BREXIT vote is profound, not just for its economic impact, but because it clearly demonstrates the extent of anger in Britain and the world with slow growth. The change is contrary to the way the world has been moving since WWII—a time of globalization that has been relatively peaceful and prosperous for the world.

Now, Pandora’s box has been opened and the discontented individuals around the globe may feel emboldened by the BREXIT outcome. The British will now try to stop Scotland and Northern Ireland from leaving the country, as well as businesses in the UK.

Global Trade
If the movement against global trade continues, there may be adverse effects. These could include lower growth and higher inflation.

U.S. Dollar
Uncertainty sends investors to “safer” areas like the U.S. dollar. As the dollar strengthens, imported goods become more affordable and “Made in the U.S.A.” goods become more expensive. A strong U.S. dollar can also hurt U.S. companies because their exports are more expensive to consumers outside this country. Of course, as investors, we are owners in many of these companies.

The strong dollar was a problem in 2014 and 2015 for corporate earnings and the stock market. How big of a problem it is in the future depends on how high it goes.

Interest Rates
Low interest rates may be around for a while longer. The Federal Reserve wants to raise rates back to “normal.” However, it can’t risk destabilizing the markets and it wants to stay away from influencing the election.

Consumers
Short-term benefits to consumers will come in the form of lower interest rates and a strong dollar. Rates could be even more attractive on mortgages, auto loans, and other forms of debt.

A strong dollar should also help make international travel and international goods a little less expensive. Even the rise in oil prices should slow down, which will help keep gasoline prices down for consumers.

Volatility in stocks may increase as investors adjust to the new realities. I would consider any significant drop as an opportunity.

BREXIT is unlikely to have a major impact on U.S. consumers’ jobs, wages, debt, or spending. U.S. consumers are strong and their spending drives 70 percent of U.S. economic growth!

This surprising storm has passed and the sunshine has appeared again. While uncertainty may drive the market over short periods of time, economic growth will drive it in the coming years.

Tags: , , , ,

Election Year Update on Markets

By | 2016, Money Moxie, Newsletter | No Comments

The bull market is seven years old. Global growth is anemic and corporate profits are no longer rising. These suggest that bad times are ahead, but I don’t believe it. I believe the U.S. consumer and the U.S. economy will continue to rise.

In January I made three predictions for the New Year. This month I would like to review these predictions with a special emphasis on the election—not only because I have been right (so far), but because each is helping the economy press forward.

Election Year

(1) The Fed will move slowly.
The Federal Reserve entered the year expecting to raise rates four times. In recognition of slow global economies, it now plans to encourage growth by keeping rates low. Moving rates up only twice this year could be better for stocks and bonds.

(2) Election years are not recession years.
Investors fear uncertainty, and election years have experienced greater fluctuations than other years. The stock market typically begins the year a little slower and then recovers before spring. Summer slowdowns occur most years, but in election years they come earlier.

Regardless of which party has a candidate in the lead, stocks typically improve as the election gets nearer. In fact, many investors are tempted to stay away until after Election Day. This simple strategy would have only delivered lost opportunity in most election years. The greatest gains actually occur in the months leading up to the election. By the way, keep an eye on the market in September and October, because a strong stock market preceding the election also appears to favor the incumbents and their parties.
I do not expect the current rally that began in February to continue without disruption. From February 11, 2016, through the end of March 2016, the S&P 500 rallied 12.6 percent. If it continued at that rate for the rest of the year, we would have a whopping 150 percent return. The market will slow down and election year history suggests this will take place in April.

Since 1927, the U.S. stock market has been positive in election years 80 percent of the time. Remember, there are no guarantees. An election year had not had a bear market loss of -20 percent anytime in the last 50 years, then came the worst presidential-election year. In 2008 the Dow lost over 38 percent. The best election year was in 1996 when the Dow gained 26 percent. Since 1900, the average has been a positive 7.3 percent.

I don’t recommend sticking our heads in the sand or placing our investment dollars on the sideline. Staying invested for the long-run is a critical part of a solid strategy.

(3) The United States will grow and the dollar will slow.
The 500 companies in the S&P 500 index receive roughly half of all their sales from overseas. So, when the dollar rises by 30 percent like it did in 2014 and 2015, it really depresses profits and makes stocks look less attractive.

The good news is that this trend has slowed down and maybe even reversed. The U.S. dollar declined in value by 4 percent in the first quarter of 2016. I view this as a positive, since we are coming off such lofty highs. The changing value of the dollar should improve U.S. growth in 2016.

Tags: , , , ,

Investing in 2016 The Fed and Election Years

By | 2016, Money Moxie, Viewpoint | No Comments

January MarketPoint_Page_1

(1) Historically, when rates rise they rise sharply, but “this time will be different.” This phrase raises a red flag. However, I see no need for the Federal Reserve to increase rates quickly. Our economy is growing slowly and inflation is near zero.

Oil and food are unlikely to keep dropping in 2016 like they did in 2015. So, inflation may rise. (Without food and energy inflation is currently 2 percent.)

The Fed stated it may raise rates 4 times this year, but I am not convinced it will do that many.

Normally, rate hikes would be negative for bonds, but U.S. bonds are still paying attractive dividends compared to others overseas.

(2) Election years are not recession years. The economy will expand as the recovery in the United States enters its 8th year. The next slowdown is coming and no one knows when. However, I don’t see convincing data for its arrival in 2016.

Election years usually start positive, slow down in the summer, and then rally in autumn–similar to most years. However, the rally in the fall does not typically begin after election day like many investors believe. It usually begins before the uncertainty is over–catching many off guard that are waiting. The average for a presidential election year is 9 percent.

(3) United States grows and the dollar slows. Global diversification should help investors in 2016, but the United States will continue to be a financial leader. Global returns will hinge on the U.S. dollar.

Since July 2014, our dollar has risen in value against every major currency around the globe! It gained 20 percent versus the euro and 54 percent versus the Russian ruble!

Why the big move? In all the world, our economy is one of the best and we are the only ones raising rates. Both of these make our dollar more attractive to global investors.

With so many countries lowering rates to stimulate growth, it is possible their economies will strengthen and the dollar’s rise will slow. Overall, this would be good news. It would likely help those that have diversified globally.

market graph

Does 2015 offer any clues as to what 2016 will bring? In 2015, the S&P 500 finished within 1 percent of where it started. This has only happened in 4 previous years (1947, 1948, 1978, 2011). What happened following those respective years? In 3 out of 4, the market was up more than 10 percent. The outlier was 1947. It was followed by another low return year and then came the double digit. Of course, there are no guarantees.

History does firmly support the value of diversification and investing over the long run.

 

*Research by SFS. Data from Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, and Dow Jones Global are indexes considered to represent major areas of stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

Tags: , , , , , ,

Is the Dollar in Danger?

By | 2015, Money Moxie, Newsletter, Viewpoint | No Comments

The dollar has ruled supreme as the global reserve currency for over seven decades. It is the preferred means of payment, value, and reserve. As the most trusted currency on earth, it rewards Americans with lucrative privileges. While the dollar’s dominance is unlikely to last forever, a change would be difficult.

Dominant Dollar
The dollar’s source of power comes from trust and economics. We have a stable government a deep financial system. Against these benchmarks, other currencies fail. Our economic production represents 23 percent of global GDP.1 It is safer, easier, and less expensive to trade assets here than any other place on earth.

Profitable Privileges
The U.S. dollar is roughly 5 percent stronger than it would be if it were not the global reserve currency because foreign investors, corporations, and governments purchase dollars.2 This raises the value of our assets (real estate, stocks, etc.) as Americans and helps us enjoy a higher standard of living. Imported goods and overseas travel are especially more affordable. The impact of this wealth effect is estimated to be as high as 0.5 percent of GDP,2 which would be an increase of $900 billion for Americans this year.

In addition, almost 90 percent of world trading is done in dollars.3 This saves U.S. corporations money and lowers financial volatility.

The dollar’s status also increases demand for our government debt. According to Wikipedia, 63 percent of all reserves in the world are dollar-denominated debt. This demand lowers borrowing costs and saves our government an estimated half of one percent on interest.2

Greenback Drawback
In order to maintain the greenback’s place at the top, our government must borrow from and pay interest to everyone else. In addition, our strong dollar makes labor more expensive here. That is one of the reasons why jobs have been going overseas for decades.

Approximately 30 percent of S&P 500 companies get half their revenue from outside the United States. The strong dollar makes exports more expensive in foreign markets and may shave 0.4 percent from the U.S. economy this year.4

Challenging Change
Dethroning the dollar would be a process. It is not something that any group of individuals could change with a vote (Russian President Vladimir Putin has tried).

China is the world’s second largest economy. Should its yuan be considered a strong alternative? It is doubtful because the Chinese government wants a weak currency. It decided to lower the yuan’s value by 2 percent in August. This deliberate devaluation destroys trust, and no country has ever established the global currency through devaluation. This helps explain why the yuan is used in less than 3 percent of world trade while the dollar is used in 45 percent.5

Now What?
Extremely positive things are happening for the dollar and many experts are worried that the dollar may be too attractive. Between April 2014 and April 2015 the dollar appreciated 13 percent6 (a massive move for currency). Now, the Federal Reserve is conflicted over whether to raise rates because it may cause the dollar to strengthen even more.

The so called “experts” and conspiracy theorists will continue to beat their drums. No matter how logical their arguments appear, their poor predictions are meant to create fear.

Discussing the dollar’s status into the future and working hard to maintain its credibility is vital. If we do this, I believe it is safe to say that the days of the strong dollar will be with us for many, many years to come.

 

1. Derek Bacon, “Dominant and Dangerous,” The Economist, October 2015.
2. Richard Dobbs, David Skilling, Wayne Hu, Susan Lund, James Manyika, Charles Roxburgh, “An Exorbitant Privilege? Implications of Reserve Currencies for Competitiveness,” McKinsey & Company, December 2009.
3. Milton Ezrati, “Currencies: Yuan Wrong to Rule Them All,” Lord Abbett, November 2015.
4. Chris Matthews, “The Strong Dollar: Your Enemy or Friend?” Fortune, March 2015.
5. Fion Li, “Yuan Overtakes Yen as World’s Fourth Most-Used Payment Currency,” Bloomberg, October 2015.
6. Federal Reserve Bank of St Louis.

Tags: , , , , ,