Martin Enlund, Research Analyst at Nordea Markets, suggest that at an age of seven years, the upturn in the dollar has now lasted longer than the bull run in the eighties and in the nineties and if the dollar turns around, it will be a big deal for asset allocation.
Key Quotes
“Will US markets ever stop outperforming? Or rather, when? Those are two of the most important questions for asset allocators. Measured in dollars, the S&P500 has outperformed the EAFE (a developed market index) by roughly 100% since the end of the last US recession (in 2009).”
“Would a new US recession do the trick, and stop the relative outperformance of the S&P500?”
“Based on the past three or past five US recessions, we can conclude that a US recession is by itself not a reason to change asset allocation (US vs DM ROW).”
“The dollar usually gains during US recessions (when looking at the post-Bretton Woods era of floating exchange rates). Twelve months into a new US recession, the trade-weighted dollar has risen by an average of 6%, and by 10% two years after the onset of a recession. Only once, in 2001, was the dollar weaker (by 4%) after 24 months. Thus, a generally stronger dollar usually helps US markets outperform also in recessions.”
“Moreover, a stronger dollar generally tightens financial conditions outside of the US. This is counter-intuitive.”
“As the dollar tends to gain during US recessions, it not only underpins the return of the S&P500 but also weakens the return elsewhere due to a negative impact on activity. Hence the direction of dollar is quite important for asset allocation decisions.”
“The past two major bull moves of the dollar in the early eighties and the late nineties lasted for 6.4 and 6.8 years respectively. Measured by the trough to peak in the dollar, the S&P500 outperformed the MSCI EAFE index by 10% and by more than 100% in these two periods.”
“During the two periods where the dollar showed a long weakening trend, the S&P500 instead underperformed the MSCI EAFE index by 15% (1985 to 1995) and 25% (2002 to 2011).”
“At an age of seven years, the upturn in the dollar has now lasted longer than both the bull run in the eighties and in the nineties. Could it be getting old in its tooth? If the dollar has peaked or is about to peak, you are likely to get outperformance in assets outside of the US.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD eases below 1.0850 on renewed USD strength
EUR/USD stays under pressure and trades in the red below 1.0850 in the European session. Although the ZEW survey for Germany and the Eurozone showed a noticeable improvement in economic sentiment, broad USD strength doesn't allow the pair to gain traction.
GBP/USD drops below 1.2700 on notable US Dollar demand
GBP/USD is extending the downside below 1.2700 in the European trading hours on Tuesday. The ongoing bullish momentum in the US Dollar, despite sluggish US Treasury bond yields, undermines the pair. Mid-tier US housing data are coming up next.
Gold price struggles to lure buyers, holds steady above one-week low ahead of FOMC meeting
Gold price ticks lower amid reduced Fed rate cut bets, elevated US bond yields and stronger USD. Geopolitical tensions could lend some support to the safe-haven XAU/USD and help limit losses.
Why is the crypto market crashing?
The two most important contribution to the ongoing bull market is the meteoric rise in Bitcoin due to the ETF approval and the sudden interest spike in Solana ecosystem. But the recent move suggests that the upward momentum is dissipating and a correction looms.
Canada CPI Preview: Inflation pickup could scale back bets on early interest-rate cut
The Canadian Consumer Price Index is expected to have risen by 3.1% YoY in February. The BoC shows no rush to lower its interest rate. The Canadian Dollar maintains its multi-day lows against the US Dollar around 1.3540.