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

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021