A reader recently noted that much of the stock market's rally is an illusion. Instead, it is a compensation for a simultaneous decline in the dollar.
This is partly true. On March 5, 2009, the Dow hit 6,594, its lowest point in this recession. It rose 44% to 9,505 on August 21. The dollar fell 13.8% during this same time period, when compared to the euro. For investors in Europe, the Dow only rose 30%.
What It Means to You
Why should you care about investors in Europe? Because they invest in U.S. stocks. While a 30% return is still fantastic, it still isn't the 44% return U.S. investors got. This makes the U.S. stock market a less attractive investment, lowering future returns on your 401(k). Since the dollar is likely to continue its downward trend, it makes the Dow even less attractive overtime.
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(Photo Credit: Spencer Platt /Getty Images)
Comments
What does this mean? —> “While a 30% return is still fantastic, it still isn’t the 44% return U.S. investors got.” Who got a 44% return?
Very interesting. With the U.S. dollar declining, I assume that even with that 44% gain, if profits were taken and those dollars used on a trip to Europe, they probably wouldn’t go far. Any suggestions on how to get that 44% return AND downside protection against the dollar, or is this a matter of having my cake and eating it, too?
I’m happy to see someone addressing the correlation between dollar declines and stock market inflation. Most people never make that connection.
If people want to hedge against dollar declines, they can either short the dollar in forex markets, or go long on a gold ETF in the stock market. Not a perfect solution of course, but it would buffer some of those losses on the falling dollar.
The dollar appears to be preparing for a rally, so get ready for a stock market shift.
To Joanne,
If you bought an investment on March 5 that represented the Dow Jones Industrial average, you would gain a 44% return on your investment. Most investors aren’t able to time the market that closely…for all we knew, the Dow would have kept plummeting for another 2,000 points. In fact, many analysts were calling for a Dow 4,000 at that time.
To Tony,
I think John is correct. Couldn’t you also go long with a euro denominated investment?
To John,
What cues tell you the dollar will rally? This concerns me, because it could indicate another flight to safety.
It also confirms my gut feeling that says the economy may dip again next year. I also wouldn’t be surprised if the Dow retests its March lows.
Kimberly
Kimberly,
I have the same gut feeling that you do. There are far too many factors that are not being addressed in the economy and it has been propped up mostly by government spending.
This is just a theory, but I suspect that there will be more liabilities revealed sitting with banks in the near future.
The dollar rally theory does come from an expected flight to safety. In the short term, I see at the very least a stock market correction, but I truly expect a reach back to the march lows and maybe beyond.
The good news about such a thing happening is that it means that there will be some reality out there and the rebuilding process can start.
Hi John,
I completely agree! I just wish I knew when the revisit would occur! My sense is it will be sometime between Q4 2009 and Q4 2010.
Kimberly