Or is it? The Dow Jones Industrial Average increased 2.03% yesterday, on the surface a nice gain for the index. Rises such as that give confidence to investors that the worst is over and it’s time to work back into stocks. Let me briefly present the other side of that argument.
Dollar vs. S&P 500
One sign of trouble is the S&P 500 has recently very closely tracked the dollar – inversely. When the dollar sneezes, the stock market jumps. When the stock market sneezes, you know it caught the flu from a surging dollar. Many places have detailed this correlation, here is an especially good post from The Crow’s Nest.
Both this section and the following are scarier than they actually first appear. Since residents of the United States purchase things (generally) using dollars, it’s likely we are somewhat insulated from the pain. The more relevant ‘pain’ gauge, of course, is the inflation measure, put out by the BLS. The stats in this article are better used to understand our position versus the rest of the world. Similarly, these graphs ignore dividends.
S&P 500 in Real, Weighted Dollars
Recently there was a post over at FT Alphaville comparing the dollar to the dollar trade weighted index. As expected from the previous discussion, the index has never reclaimed its highs from the technology bubble.
- FT Alphaville Chart of S&P 500 vs. Trade Weighted Dollar
Thoughts?
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