Traders kept the party alive on Monday, as the Dow Jones Industrial Average took another step toward new all-time highs.
After tech stocks punched their way to an all-time high on Friday, the S&P 500 and Dow Jones may not be far behind. And there’s one good reason why: a weaker dollar. As Peter Kinsella at Union Bancaire Privee put it this morning:
I’m of the view that the dollar will continue to weaken and the Fed printing literally an unlimited quantity of QE… broadly speaking that’s very, very supportive for global assets, for risky assets.
A weaker dollar is a massive catalyst for stocks that many analysts aren’t talking about yet. Why? Because a weak dollar is beneficial for giant American corporations. Most make a significant portion of earnings abroad and get a better conversion rate when the dollar weakens.
Traders started this week in the same mood as last Friday: aggressively risk-on. The Dow Jones jumped more than 220 points (+0.81%) in mid-morning trading on Monday, extending three straight weeks of gains for the index.
The S&P 500 rose 0.14%, although the Nasdaq edged 0.11% lower after recording a new all-time high during the previous session.
Those investors waiting for a significant pullback may be disappointed. Stronger-than-expected jobs data on Friday propelled the Nasdaq to a record high, suggesting the worst of the economic earthquake is over.
Kinsella agreed that what he’s seeing on the currency markets is consistent with a recovery, not a continuing crash.
What we tend to see during global economic recoveries is that the dollar does tend to weaken.
The Bloomberg dollar index shows the world’s reserve currency has fallen over the last month. How to interpret this? A simple reading is there’s more appetite for risk and less demand for ‘safe’ cash. That’s indicative of a recovery.
We saw a similar phenomenon play out in Britain back in 2016. The pound weakened due to the Brexit vote and the perceived economic disaster. But that propelled the country’s stock market to record highs within a few months.
Investors remain fiercely divided over the latest rally. Bulls argue that the once-impossible V-shaped recovery is actually playing out. While the bears stubbornly maintain that stocks are in a parallel universe, driven only by Fed stimulus.
Esty Dwek at Natixis Investment Managers leans towards the latter, arguing that the market is “priced to perfection” at these levels. She thinks investors should proceed with caution.
We don’t like to chase this rally.
She admits, however, that we’re unlikely to see another large correction. Dwek pointed to the broadening of the market, high cash levels on the sidelines, and a healthy dose of FOMO about to kick in for investors that sat out the rally.
One thing everyone can agree on, however, is the stock market is expensive at these levels.
In fact, stocks are the most overvalued in 20 years, based on future earnings forecasts. The MSCI ACWI index, which tracks 49 equity markets, is now trading at 17.8x future earnings. That’s the highest since the dot-com bubble.
And a Bloomberg TV chart shows that stocks are in wildly overbought territory, with RSI (a technical indicator used to pinpoint over-valued conditions) pushing over 70.
With that in mind, Kinsella said we may see some profit-taking in the coming weeks which could cause a plateau in price. But he thinks it will be short-lived before the rally continues on.