Even though the US dollar has slipped a bit against the currencies of our major trading policies as of Friday afternoon, over the last several months, the dollar has shot up at a historically high rate.
Tom Lee of Fundstrat circulated a research note arguing for a largely bullish outlook on US stocks over the next several months. One of the indicators that gives a somewhat mixed signal, however, is the recent strength in the US dollar.
Lee points out that a strong dollar weighs on corporate profits, since US companies will likely be selling fewer goods and services overseas, cutting into corporate revenues coming from abroad.
On the other hand, Lee also points out that “history shows equities do well during periods of dollar strength — as the dollar strength stems from underlying economic growth (relative to rest of World).”
That is, a strong US dollar is usually an indicator that the overall US economy is doing better than other countries, and that underlying economic strength could help boost stock prices.
However, Lee has an extra caveat: Part of the dollar’s recent strength could be coming from loose monetary policy in Europe and Japan weakening the currencies of those major trading partners, rather than being entirely a reflection of US economic health, and so some caution is needed.
Lee also included this impressive chart, showing the rolling 7-month change in the value of the dollar. That change in strength is an indicator of how quickly the dollar is rising or falling relative to other currencies. The chart shows that the dollar has risen faster than at any point in the last 34 years. The title of the chart, referring to a “3 standard deviation rise,” means that the current dollar rally is something of a statistical outlier:
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