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Is the mighty U.S. dollar weakening?

If the currency turns lower it may mean inflation is cooling — and improved conditions for U.S. investors and companies.

Our Top Market Takeaways for November 18, 2022

Market update: There are [at least] three economies

Stocks were choppy this week as they tried to consolidate their big gains after last week’s encouraging inflation data. Perhaps the mixed messages from economic data and earnings releases made it difficult to identify a clear trend. Sometimes, it seems like there is way more than one economy.

In one economy, everything seems pretty decent. October retail sales came in above expectations and showed the strongest monthly growth since February. Jobless claims are low (and fell relative to last week), supply chain pressures have dissipated, and gas prices are falling. The Atlanta Federal Reserve’s estimate for fourth quarter GDP is signaling a whopping 4% growth rate. Retail giants like Walmart, Home Depot, and Lowes all reported strong third quarter earnings results. Demand for Taylor Swift’s Eras tour is so high that Ticketmaster is cancelling a planned public ticket sale and tickets in the upper bowl of MetLife Stadium for her concert next May are re-selling for over $1,000. 

But it seems like some are operating in an entirely different economy. Target missed analyst targets (get it?) due to shifting consumer spending patterns and inventory management issues. Their CEO cited “consumer stress” from inflation, higher interest rates and broad economic uncertainty as reasons for the weak results. Likewise, business surveys from the Philadelphia and Kansas City Feds signaled continued weakness, and almost every CEO from a recent survey indicated that they were preparing for a recession. The University of Michigan’s measure of consumer sentiment is as low as it was during the depths of the Global Financial Crisis in 2009.

And finally, it seems like there is another economy altogether that is in some sort of recession. Tech companies like Alphabet, Cisco, Roku, Amazon and Meta have all announced job cuts. Housing starts have plummeted along with mortgage application as higher interest rates and lower home affordability have frozen new lending activity. The tech-heavy NASDAQ 100 index is down almost 30% so far this year, versus the more “old economy” Dow Jones Index, which is only down ~8%. 

Then there’s crypto.

The continued fallout from the implosion of FTX (the former crypto exchange) and its related hedge fund Alameda continues to ripple through the blockchain. Crypto lender Blockfi is reportedly filing for bankruptcy, and players like Gemini and Genesis are facing material liquidity shortfalls. While the crypto ecosystem may be living its own version of the Global Financial Crisis, we expect the fallout to be limited. The total market cap of crypto-currencies is down to $866 billion, which is about the same size as the market cap of Amazon. Coinbase, one of the largest publicly traded players in the space, employs a total of 4,000 workers.

It's difficult to fit every story into one clean narrative. However, it does seem like the tightening cycle from global central banks is starting to have its intended impacts of slower growth, lower inflation and less speculation.

Another force that was dragging global growth lower was the ever strengthening U.S. dollar. However, that trend may be turning soon.

Spotlight: Is the dollar finally turning?

Before last week’s weakness, the dollar had been having its best year since the 1970s. This matters for investors; currency exposure can generate substantial outperformance or underperformance, pending on which way it swings, and multinational corporate earnings are likewise impacted.

This year, a strong dollar has been a headwind for U.S. investors that also allocate globally. For example, an investment in Europe this year would be down -17% — compared to -9% if you invested in euros and didn’t convert your investment back into dollars (the currency impact for dollar investors is represented by the brown section of each bar in the chart below). The same can be said for U.S.-based multinational corporations. The strong dollar shaved -4% from third quarter revenue growth.

But with the recent downturn in the dollar mind, are we on the precipice of a turn the other way?

The U.S. dollar tends to strengthen when the global economy is weak, the U.S. outperforms the rest of the world and the Fed goes on the offensive with rate hikes. On the other hand, the dollar tends to weaken once the Fed pivots back toward more accommodative policy, and the rest of the world grows in tandem.

That’s held true this year — the dollar has been so strong that, now, across pretty much every fundamental valuation framework we use — whether that be through looking at historical averages, interest rate differentials, or U.S. vs. global growth — it looks “overvalued.” This remains true even as the recent declines have taken some of the froth out of the historic strength.

That said, valuation alone isn’t enough. To see the dollar turn for sure, we’ve said we need to see:

  • Evidence that inflation is cooling in the U.S., which gives the Fed room to pause from its ultra-hawkish stance
  • Global growth expectations stabilize, and ideally, improve (particularly from China and Europe)

Over the last week, we’ve seen progress on both fronts. The softer-than-expected U.S. CPI report was a clear start, China has made moves towards reopening and supported property sector weakness, and European natural gas prices are over 60% off their summer highs.

That said, macro uncertainty is still high and recession risks remain elevated,  particularly outside of the U.S. So, we aren’t yet waving the flag for the dollar’s turn — but we are paying close attention. That continues to leave us with a preference for U.S. over international assets.

Investment implications: It’s a dimmer-dial, not an on-off switch

While we think we are still a ways away from a genuine turn in the dollar, the two catalysts for dollar weakness (stabilizing inflation and global growth) are likely not too far on the horizon. With that in mind, it may make sense to take profits on some investments that have benefitted from this year’s historical rally in the greenback.

Positioning for a turn in the dollar generally happens in two stages: First, currencies and precious metals that tend to provide lower growth and yield (like the Japanese yen and Swiss franc, and gold) tend to recover. And later, when there are full-on early cycle dynamics, higher-growth-oriented currencies (like emerging markets) rally. We think investors should start thinking about that first stage. But remember, investing through cycles is about using dimmers and dials as the environment shifts. Your portfolio shouldn’t have an on-off switch.

Over the longer term, our long-term-capital market assumptions stress that any investor making a strategic allocation decision across global asset markets today should also carefully consider the impact of currency movements, as it will be a meaningful component of future returns. USD-based investors, in particular, could be positioned to reap the tailwinds from ex-U.S. exposure as the dollar reverts back to more average valuation metrics. 


All market and economic data as of November 18, 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

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