The U.S. stock market has hit dozens of all-time highs in
2017, but that run may be obscuring a factor that has Wall Street’s rally
looking less impressive from an outside perspective.
Stocks have gained for a number
of reasons this year, including a strong second-quarter earnings season,
improving economic data, and prospect for tax cuts, which if enacted is
expected to be beneficial for corporate profits and share prices.
Those are all obvious
tailwinds, but another major factor has a more complicated relationship with
the economic environment. The U.S. dollar DXY, -0.02% has
trended lower throughout the year, down 8.6% in what could be its biggest
annual decline since 2003. A weak dollar tends to benefit stocks, especially
large multinational companies, which see their profits erode in periods of
dollar strength due to currency headwinds. Such global stocks, including Apple AAPL, -0.65% and
Boeing BA, +0.12% have been among
the market’s leaders so far this year.
The dollar’s weakness in 2017
could mean that Wall Street’s records are just “a domestic perception,”
according to Robert Michaud, chief investment officer at New Frontier Advisors.
“While the market has risen
year-to-date, the dollar has fallen relative to other currencies. Therefore,
international investors may not perceive the U.S. at a market high,” he wrote
in a research report. He added that on a dollar-adjusted basis, the S&P 500
was “significantly below” a high hit in the first quarter of the year, even as
the unadjusted benchmark has trended higher, as seen in the following chart,
provided by New Frontier Advisors.
“From a purchasing power perspective, the U.S. stock market
peaked at the beginning of March,” Michaud wrote. “This calls into question how
much of the recent rise of the stock market is associated with expectations of
future growth and the health of the economy. The global economy is not valuing
the U.S. equity market as much as the market high would suggest.”
The dollar’s decline this year
has been particularly pronounced against the euroEURUSD, +0.0935% which
has benefited from improving economic data throughout the eurozone. Separately,
some analysts said the dollar’s rally in the immediate aftermath of President
Donald Trump’s election had been overdone.
The buck has shown a modest
recovery over the past month, having risen 2.8% since an intraday low hit on
Sept. 8, which represented the lowest level for the currency since January 2015.
Why stock market records may just be a mirage caused by dollar weakness
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