Remember last summer? Pundits warned the falling dollar foretold economic and market doom? Continued growth and surging stocks proved notions of greenback prescience were phooey. Now, doomers fear the reverse: a rising dollar—claiming it signals a stalling global recovery—and looming danger for US stocks. More hogwash. History proves currency moves predict neither market direction nor country leadership. Today’s dollar rise merely reflects an underappreciated bullish reality: America’s golden gridlock. Let me explain.
After January’s Georgia Senate runoffs gave Democrats congressional control, I told you gridlock reigned nonetheless. The dollar offers another way to see that. Historically, the dollar appreciates when the White House, Senate and House of Representatives aren’t under one party’s control—the traditional, superficial gridlock definition. Conversely, when one party holds all the legislative power, the dollar typically falls.
Consider: During four years of deep-blue Democratic control between Jimmy Carter’s 1976 election win and 1980’s vote, the dollar tumbled -8.9%. Then the Republicans took the White House and Senate—but not the House. Gridlock! The buck soared 12.3% in the 12 months thereafter and a massive 39.1% by Election Day 1984—a rise that led to 1985’s international currency market intervention.
Bill Clinton’s November 1992 win brought a Democrat-controlled government until 1994’s midterms. During this span, the dollar slipped -3.9%. Then the “Republican Revolution” delivered gridlock lasting until 2000. In the first year after 1994’s vote, the dollar was flat. But by November 2000’s election, it was up 24.4%. Then came six years of GOP control—and an -21.5% dollar decline. This same overall trend holds repeatedly through history.
Anyone with a computer and a spreadsheet can see it. It’s ABCDI—Any Body Can Do It! In today’s age of free-flowing data, anybody does see it. Lots of anybodies! Instant, easy access to data means that if a theory, hunch or inkling can be crunched, hordes of investors have already crunched it, as I noted back in August. Markets far and wide price in new information ultra-quick, making any edge fleeting. Hence, gaining an advantage requires seeing what the data devotees miss.
Today, they fret the dollar’s unusual rise during a unified government. They worry currency markets must see some big negative stocks don’t. They speculate the greenback’s strength signals COVID resurgences and vaccine delays will doom Europe’s recovery. Or rising US bond yields are dampening “risk appetites,” luring investors from stocks. Or it compounds debt problems for Emerging Markets borrowers. Or the Fed is closer to “tightening” than policymakers say. Or, or, or!
But currency markets see nothing stocks and bonds miss. Today markets simply fathom beyond Democrats’ ostensible legislative control and see razor-thin Congressional margins and intra-party squabbles cementing gridlock. Always remember: Among similarly liquid markets, there is no “smarter” asset class. Stock investors have access to the same economic reports, analysis, historical data, rumors and buzz that currency traders have—all in the identical timeframe. In many cases, those investing in currencies are the same people investing in stocks!
Then, too, history shows dollar wiggles don’t drive stocks. Last August I showed you the greenback’s moves don’t correlate to US stocks’ overall direction. They don’t drive America’s relative performance against other countries, either, even as the dollar’s dips and rises add to and subtract from returns earned overseas, respectively.
Sometimes the dollar rises while US stocks lead. In 2019, American stocks soared 31.5%, topping the eurozone’s 23.2% gain while the dollar rose 1.8% against the euro. But last year, while the dollar tumbled -8.3% against the euro, the S&P 500 led eurozone stocks again, 18.4% to 7.9%. Since 2000, the dollar’s strongest year against the euro was 2005, when it jumped 15.2%. That year, eurozone stocks topped the US, 8.8% to 4.9%. US stocks’ strongest year over the same stretch was 2013, when their 32.4% rise beat the eurozone’s 28.9%. The dollar fell -4.3% that year.
Gauging dollar strength against a broader basket of major currencies yields no real pattern, either. On that basis, the buck’s moves have a correlation of just -0.14 to US stocks’ relative performance versus the rest of the developed world over the past 20 years. That signals a severely slight tendency for American stocks to lag the world when the dollar strengthened. But given 1.0 is perfectly parallel movement and -1.0 is polar opposite, the relationship is beyond flimsy—statistically too weak to matter.
Why don’t currency moves affect stocks as much as people expect? Currencies and stocks have different drivers. But globalization muddies currency moves’ impact, too. Today, few companies make and source products exclusively in one nation. They often import raw materials, machinery and components, or have overseas operations. Think about US smartphone producers. They source components from numerous countries. Maybe they’re designed in the US. But chips stem from Taiwan, displays from Korea, perhaps all assembled in China. A strong greenback cuts those costs. That doesn’t make it purely positive for them either—many firms sell their phones worldwide. Dollar strength could hit revenues denominated in weaker currencies. This is why most multinational firms hedge against potential currency fluctuations. It mitigates swings’ impacting their bottom lines.
The last year’s weak dollar fears’ flipping so fast to strong dollar fears tells you currency worries are about sentiment, not fundamentals. While moods are broadly warming, persistent dollar worries show this late-stage bull market still has more wall of worry left to climb.