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.


A stronger dollar crimps exports and foreign profits
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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.

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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.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..