Is the weakening dollar creating a hidden opportunity in foreign stock markets? A recent Bloomberg article, "The Great Debasement Is Rippling Across Markets," highlights a fascinating trend: while everyone's focused on gold and silver soaring (up 50% and 75% year-to-date, respectively!), foreign stocks are quietly crushing domestic benchmarks.
From the beginning of the year until mid-September, the U.S. dollar index plummeted nearly 15%. This dollar weakness is fueling the "debasement" narrative – the idea that the dollar's value is eroding, pushing investors towards alternative assets. But here's where it gets controversial: while precious metals grab the headlines, foreign stocks are also reaping significant benefits.
Consider this: the iShares Foreign Developed Markets ETF (EFA) is up about 25% this year, and the iShares Emerging Markets ETF (EEM) has surged by approximately 29%. Now, compare that to the S&P 500's roughly 15% gain. That's a substantial difference! And this is the part most people miss: this outperformance reverses a long-term trend. Over the last five years, the S&P 500 has trounced foreign markets, boasting a 95% increase compared to EFA's 43% and EEM's meager 17%.
This raises a crucial question: what happens if the dollar stages a comeback? Will this negative correlation between the dollar and foreign stocks turn against them, dragging their performance down? Our analysis suggests the answer is likely yes. Think of it like a seesaw - when the dollar goes up, foreign stocks tend to go down, and vice versa. So, while the rally in foreign stocks is exciting, it's crucial to remember that underlying economic fundamentals may not fully support this surge. Dollar correlation works both ways, so be aware. The graphs below, which show the price of EEM and EFA in reverse order to better highlight the relationship, clearly illustrate this strong negative correlation. The bottom graph in each case shows the 50-day correlation.
But here's a counterpoint, also highlighted in the Bloomberg article, from Shoki Omori, chief desk strategist at Mizuho Securities Co.: "Whoever thinks currencies and bonds are replaceable with bitcoin and gold needs a reality check." Omori believes we're simply witnessing a "momentum trade," where investors are piling into a seemingly winning asset class, regardless of its fundamental value. Is this a valid concern? Are investors irrationally exuberant about foreign markets?
What to Watch Today
Keep an eye on earnings reports, economic data releases, and overall market trading activity.
Market Trading Update
Yesterday, we discussed the short-term risk of Friday’s pullback potentially failing, leading to further corrective action. Monday saw a rally to the 20-day moving average (DMA), which was broken on Friday, but the market failed to move above it. Yesterday, the market sold off and retested the 50-DMA on the open. Bullishly, retail investors are stepping in to "buy the dip," allowing the market to rally off support. The key question is whether there will be enough follow-through to push the market back above the 20-DMA before the week's end. Failure to regain the 20-DMA increases the risk of further consolidation or correction. The 50-DMA is now key support, with the 100 and 200-DMAs as the next critical levels if the market breaks down. Notably, the MACD has triggered a sell signal, and relative strength is still correcting previous excesses.
While our warnings about risk management may have seemed repetitive during the market's relentless rise, these breaks demonstrate their necessity. While we remain bullish for the year-end, avoid overreacting to current market action. Given the current sentiment/momentum, corporate buybacks, and the need for professional managers to catch up on performance, we anticipate a higher market by year-end. Buying on current weakness is likely a good idea, but balance speculative exposure with defensive offsets. Market risk exists, and you don't want to be caught off guard if something breaks.
JPM: Good Earnings But…
JPMorgan Chase (JPM) reported strong earnings, yet its stock price declined, indicating shareholder caution. JPM opened down over 4% despite beating EPS estimates by 5% and revenues by 3%. Several factors contribute to this reaction:
- Rising operational costs and credit concerns: Investors are wary of increasing expenses and credit costs, which raise concerns about the sustainability of profit margins.
- Profit-taking and Wall Street analyst downgrades: Some banks and brokerages downgraded JPM's rating. Oppenheimer cut JPMorgan from “outperform” to “market perform”, and Morgan Stanley downgraded it from “overweight” to “equal weight.” The stock's 30% year-to-date gain and nearly 40% increase over the past 12 months may have prompted investors to take profits.
- Economic outlook: While JPM beat earnings expectations and had a reasonably optimistic outlook, CEO Jamie Dimon offered a somewhat cloudy macroeconomic outlook. According to Dimon, "While there have been some signs of a softening, particularly in job growth, the U.S. economy generally remained resilient. However, there continues to be a heightened degree of uncertainty…"
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So, what do you think? Is the dollar's weakness a genuine catalyst for foreign stock outperformance, or is this just a temporary blip driven by momentum? Are you adjusting your portfolio to capitalize on this trend, or are you staying cautious, anticipating a dollar rebound? Share your thoughts and strategies in the comments below!
