Believe that the weak dollar means strong stocks? If so, it's time to buy
Filed under: Investing
Right now, about $360 billion is sitting in money market funds. But surely some of it must be looking at the 62% rise in the S&P 500 since the March 6 low and wondering whether it should go into stocks. Unfortunately, investors holding that cash have no easy answer: There doesn't appear to be any logical explanation for why stocks go up and down -- even though plenty of theories are advanced every day. One theory gaining credence these days says the weak dollar is pushing up stocks. If you think this theory has any credence, then you should invest in stocks for at least the next two years. Before getting into why this could make sense, remember that many theories get used to explain stock price movements.
Equity prices forecast where the economy will be in six months, stocks climb on a wall of worry, stocks rise if more cash is going into them than is going out, stocks rise on better-than-expected earnings and guidance, stocks rise if the team that wins the Super Bowl comes from the National Football Conference (more precisely, from the original National Football League, pre-American Football League merger), and so on.
I'm persuaded that the money flows theory makes the most sense, but the general public can't track the data in a useful way. So we're left with what seems to be the latest theory that appears to be working now: A weak dollar is good for stocks. Unfortunately, that theory does not seem to hold over the long run. How so?
Shorting the Buck and Buying Commodities?
The dollar is down 80% in the last decade -- from 0.827 dollars per euro on Oct. 26, 2000 to 1.485 dollars per euro on Nov. 13, 2009 -- and the S&P 500 is down 21% (from 1,380) during that same time. So, it's clear that a weak dollar doesn't closely correlate with a rising stock market. Nor is the dollar's value movements the biggest cause of stock market movements.
However, stocks have been rising this year without a clear explanation. One possibility I've heard traders mention repeatedly is that with the government taking on so much debt and the Fed pledging to keep interest rates low, traders are shorting the dollar and buying commodities, such as oil and gold.
Also, the weak dollar could make it easier for U.S. exporters to sell their goods overseas. And as the eurozone exits its recession, the governments there could start raising interest rates. If the Fed doesn't raise rates until 2011, the dollar will get even weaker relative to other currencies, which could spur the profits of U.S. exporters and push the U.S. market higher (if the theory holds).
I've decided to make a small wager on this theory by switching some money into an S&P 500 index fund. I'll provide periodic updates on whether that was a good bet.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter.
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Reader Comments (Page 1 of 1)
11-16-2009 @ 11:40AM
John said...
I think your math is off on how much the dollar has declined against the Euro, that wasn't 80%. Also, there is always as much money going out of the stock market as going in. For every buyer there is a seller. The change in price is from the percieved change in the value of the business.
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11-16-2009 @ 3:50PM
Paul Del said...
A weak dollar drives up prices, oil, goods from Europe, we should never have gone off the Gold Standard, at one time our dollar was the top currency in the World, you can not have a strong economy with huge unemployment figures, this so called recovery is following the same path that got us here, it makes no sense that the Market seems to react to bad news, sales are picking up because prices are down, 50% to 70% off on a lot of manufacturing goods, that is no recovery, Trillions of dollars in debt as far as the eye can see, so business is doing good, lol, what about the people losing homes, jobs, if you counted that we are in a depression, not a recovery
11-16-2009 @ 12:46PM
ken said...
John: To say that more money is flowing into rather than out of the market isn't talking about how much is going in versus out, but about how much of the total money supply is going into stocks rather than other assets, like commodities or bonds or savings accounts.
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11-16-2009 @ 12:58PM
jim said...
I got out of the US market the day Obama was elected.. I won't return until he is out of office...
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11-16-2009 @ 2:24PM
rob said...
I hope all the bigshot investors lose their asses.It would serve them right.
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11-16-2009 @ 4:08PM
alex said...
see? the FED decides whatever they want what interest they want to charge.. they re the ones running this country.. they are not part of our government people.. they can charge whatever they want to print our own money when it should be interest free in the first place.. we need to fight to bring power to money back to the US treasury.. and i'm aware this comment may not see the light of day.. ithink they screen my comments..instead of doing that? find out why people are thinking these men are currupt..return freedom of speech to the people.. ask questions.. find out .. don't just listen to orders.. thank you
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11-16-2009 @ 2:34PM
ray said...
Been in the S&P 500 since December. Down to 650 and back up over 1100. no regrets. the future holds for Inflation and weakening dollar. S&P 500 will hit 1500 over 18 months
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11-16-2009 @ 2:39PM
dan said...
WEAK DOLLAR GOOD FOR THE ECONOMY BECAUSE IT MAKES OUR EXPORTS MORE COMPETETIVE?The problem is that we are not dependent on exports as much as consumer spending and everything we import to sell in the U.S. becomes more expensive meaning inflation at a time when we are in a depression ,this does not bode well for the long term.
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11-16-2009 @ 2:37PM
george said...
Notice that gold is no longer shown on the markets listing??
The "experts" say the recession is over. But, Reality and "lay-offs" say inflation and depression is here for along time. Fake numbers and job claims are just to get idiots to feel better. Do the math! really, there is 20% unemployment now and rising. Vote Independent, the parties over!
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11-16-2009 @ 2:47PM
dan said...
GEORGE............You got it right and i saw this comming long before it happened i bailed out of mutual funds and invested in gold.ONLY A MIRACLE IN DOLLAR VALUE WILL REVERSE THE TREND IN GOLD VERSES THE DOLLAR.
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11-16-2009 @ 3:03PM
DAN said...
Irrational exuberance once again, the fanatical market investors will not accept the fact that our corrupt economy is on life support and the good ole days of ripp off are over. Why would anyone entrust his money to a mutual fund or portfolio manager or a particular corporation for that matter????????The same corruption and greed that brought down the Soviet Union and communism has now brought down capitalism.Ironic, Is it not?????????
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11-16-2009 @ 3:04PM
Cathy said...
someone told me that our government is gold plating tungsten bars to make them appear to be solid gold bars. can this be true?
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11-16-2009 @ 3:11PM
cliff said...
It is true.
11-16-2009 @ 3:07PM
Rick said...
Don't get suckered by any body into this market. The smart money is into cash and/or Zero-Percent C of I's.
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11-16-2009 @ 3:49PM
Tech said...
The stock market most closely tracks the oil price on a chart-check it. On my trading trading screen I stick up USO and stocks at the same time and it's amazing. Why? Because oil is the energy of the planet and industry and has backed the US dollar directly since 1971-Nixon. America doesn't much matter anymore in global finance it's just one of many countries the corporate banksters play with. Gold trades opposite the dollar as do most commodities with silver being the next closest along with oil. Stocks are derivatives, fractionlized paper of businesses which magnify the basic trading in the global economy. However most of the money is very few hands and the direction of the markets is controlled by them. They also control the media, "government", education, etc. Since you aren't in their "club",(Trilateral, CFR, Bilderburg, Council of the America's,the private FED, etc.) you have to play the trend using stops up or down and base it on the oil chart. We're still on an uptrend and have been since March but I'd watch out after December because their year end bonuses will be out of the way and the US fundamentals are awful. Oh and human beings are only a cost, a liablity on a banker's balance sheet. (Gold is great with a falling dollar rather than paper)
The only interesting change will be when global oil production declines relative to demand and this will change the world more than anything human beings have faced in their history. We're in that window. Fascinating times. Now you know the "secret".(well except the concept of fractionlized banking invented by Rothchild a long time ago-money out of thin air!)
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11-16-2009 @ 4:57PM
georeg said...
cash cash cash and gold& silver and cash ..........................that is best as long as the dummycrapts are in the whitehouse i did it in the 70s and doing it today ............................i have not lost 1 dime in this dummycrapt market.............
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11-16-2009 @ 6:33PM
ken said...
The dollar is one economic indicator of the American
economy . As it goes down things we import that really
matter cost more. Gasoline a good example. If you really
believe the stock market is the place to be and will continue to climb well everyone has a theory as long as they are investing money that is not theirs. It is just a matter of time
before the market will collaspe. Grab a rope and hang on.
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11-16-2009 @ 7:26PM
tsimpson said...
This is insane!!! A jobless recovery is not really possible.. A weak dollar may help exports, but who is going to buy our Treasuries to finance this mess?
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11-16-2009 @ 9:02PM
kevin said...
And just to be on the safe side, keep all your money in your mattress and maybe even in a coffee can buried in your back yard. One can never be to careful.
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