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Will a Stronger Dollar Lead to Market Problems?

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Friday, November 18, 2016

Strength in the U.S. markets following the general election a week and a half ago is beginning to give way toward new realities and concerns, such as a strengthening dollar making headwinds for domestic exports. Basically, good fortunes here as of late look to be creating a bit of sticker shock elsewhere, as U.S. goods and services become more expensive overseas.

The good news is, we can expect increased investment into the U.S. from elsewhere. For instance, with the German bund currently yielding roughly 0.2%, why wouldn’t German investors buy U.S. 10-years, which trade around 2.3% (up nearly 100 basis points from its mid-summer lows) instead?

Small-cap stocks have outperformed their large-cap counterparts largely for the same reasons. Most large-cap corporations are multi-nationals, relying on often 40% or more on foreign business to meet their top- and bottom-line expectations. Small-caps tend to be domestically oriented; thus, the stronger the U.S. economy, the stronger the results for the best of these firms.

This is no surprise to the markets, of course, which have already been trading thusly. We even see strength in banks and other financial institutions, at least in part due to expectations for a Fed rate hike next month. So it hasn’t even happened yet — and Chairwoman Janet Yellen’s comments on Capitol Hill yesterday, while firm, were still not emphatic about a definite rate hike on December 14th — and still we see these future potential results priced into the financial sector.

So where do we go from here? The Trump election seems to have thrown everything into a different mode, but in some ways it already looks played out, less than two weeks after he shook up the world. Will market participants begin to look at the other side of the coin, with possible tariffs on our foreign trade partners leading to static on the global stage and much higher prices for goods and services here at home? If so, perhaps we are looking at a downside to this rally coming up.

Market futures seem to be reflecting this. After the Dow hitting all-time highs earlier this week, futures are down slightly in the pre-market for the final trading day of the week. The S&P 500 and the Nasdaq are unchanged ahead of the opening bell. It would seem the market is already lamenting a lack of new direction.

Mark Vickery
Senior Editor

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