What the US Dollar Equities Correlation Is Telling Us
Many analysts believe that a weakening dollar is good for equities. But it isn't quite that simple.
With globalization and an ever-changing political and financial landscape, the capital markets have been in transition. And this has assisted in putting US equities (and the US dollar to some extent) back in the capital market driver's seat. While equities have climbed to new all-time highs, the US dollar has moderated, prompting many to start focusing on a bottoming formation. Could this be the start of a new cyclical theme? Or even secular? Could we see a final stage that includes strong equities and a strong dollar? Again, food for thought, but with the sovereign debt crisis manifesting behind the scenes, and many developed countries beginning to "print," the US dollar may indeed be the tallest midget. And for these reasons, capital has been (and may continue) flowing to US denominated assets.
Now, let me set something straight, this post has zero to do with market timing, so no need to remind me that the equity markets are elevated and a correction could occur at any time. Again, that's not the point of this piece. Yes, I'm a trader. But I'm also a passionate follower of markets, and this is a macro theme that should be considered.
Finally, let's turn to the 30-year chart of the US dollar equities correlation ratio (see below). As mentioned previously, the correlation has been strong. At present, the correlation ratio is resting near 2007 highs. But we haven't seen the type of ratio expansion that is apparent with the moves in 1987 and 1998 (and possibly not as strong as 2007). So maybe this move is more orderly than many think. We shall see.
US Dollar Equities Correlation 1981 to Present
Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.