US sprints ahead in stocks race – but its laces are undone

American equities have surged ahead, but a strong dollar could trip up US stocks in the long run.

909-US-crate-634
A stronger dollar crimps exports and foreign profits

Whether Donald Trump is isolationist or not, American equities are moving towards a "splendid isolation from the rest of the world", says John Authers in the Financial Times. Since hitting bottom six months ago, US and world markets have not recovered together. While the S&P 500 has gained 10.8%, the FTSE's World index excluding the US has slipped by 2.8%.

It's not as though the US market is always in lockstep with the rest of the world, but the current burst of US outperformance is the strongest in four years. Last year European growth was a "pleasant surprise" and China was "humming along", says Authers. Now the US boasts the strongest data, Europe's growth is anaemic, and China is, once again, dogged by uncertainty.

But now what? As Richard Barley points out in The Wall Street Journal, in the longer run a strong dollar hurts US corporate profits because American exports become more expensive and less competitive. And foreign earnings are worth less once translated back into dollars. With the members of the S&P 500 index making half their sales abroad, a strong greenback will reduce earnings growth.

Quantitative tightening (QT) the unwinding of the Federal Reserve's money-printing programme is another headwind. By selling the bonds it bought with printed money, the central bank is soaking up liquidity from the market. According to one German estimate, if the US central bank continues this policy, it will have taken $900bn out of the money supply at the end of 2019.

The effect of ongoing tightening, coupled with continued interest-rate hikes and the strong dollar, would equal a 5% interest-rate increase. Don't expect US stocks' outperformance to endure for too long.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020