Educational chart: The massive 20% rally in the US Dollar into the fall of 2022 coincided with the bear market in stocks and fears of recession as the Fed was raising rates to choke off the inflation stoked from aggressive fiscal and monetary expansion post-Covid lockdowns.
What is important to learn is how the US Dollar movements can drive earnings estimates so you are prepared for the next time when the media is blasting bearish commentary on "falling earnings estimates".
The extreme bearish sentiment in the US last year as a result of weakening earnings estimates was a sign to look at the impact of the US Dollar on those estimates.
40% of sales in the S&P500 Index are from international sources and that means that earnings from abroad will translate back into fewer US Dollars.
It's an important factor to understand when looking at the broad landscape for your investing strategy.
What is the Dollar telling us now? Neutral impact now from year ago levels means that the Dollar wont impact the earnings of the S&P500. Going forward over the next 6 months, the falling TVC:DXY of 10% will be a boost to earnings and may explain some of the 10% market rebound from the low last October.
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Over the last four months since I posted this chart (Now Sep 11, 2023) I haven't heard any media coverage of this reality in the course of listening to Bloomberg TV and reading the financial press.
I hope this chart was insightful and helpful to understanding the flow of earnings estimates given the uncertain economic environment that is always present. If we can at least understand the drivers of earnings estimates, we can get a better handle on the risks that lay ahead vs the risks that have already happened.
@TransitMan, Thank you. I'm glad I can help us to "see through" the cloud of noise and news!
Investing_Trading
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Good Thinking
plok
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Great insights as always, thanks Tim! Q: How does a rising/falling DXY affect the US domestic economy? You guys have a strong manufacturing base and energy production. Does this mean that fluctuations in DXY are less of an issue domestically? Here in Europe, we don't import the same items as we export. For example with a weak EUR, energy and food tends to get more expensive (imported and often traded in USD), while companies that export a lot have windfalls. Vice versa with a strong EUR.
timwest
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@plok, Thanks for the question and sorry I didn't catch your question right away. The strength of the USD has a long and slow impact on the economy long term and dual impact in the short term where US consumer will take trips overseas and spend the stronger currency, which weakens the US economy in two ways. First, it sends capital overseas, driving the dollar down and it weakens the US economy relatively because the spending takes place overseas instead of here in the US, which means the spending multipliers go to work outside the US instead of inside the US. The strong USD also encourages US consumer to import more goods, which hurts US producers as well to some degree. There is a benefit and a detriment to everyone in the sense that it raises wealth and spending power for US consumers, but also hurts exporters. A strong dollar also benefits foreign investors in the USDollar. Currency moves are always difficult to make assumptions about since we don't always know what consumers and investors will do. Sorry for the "non answer" but there are patterns in the dollar movement that are useful for predicting stock prices in particular. Check out my posts on the DXY moves.