Markets quickly rolled over at the end of February and into early March. At the time of our last e:Newsletter (March 13th), it looked like markets would hold. However, all the sectors that were leading, fell with the woes of possible rising rates. Then a couple weeks later further volatility came with the Silicon Valley Bank and as fear of contagions it could cause, expanded. Fortunately, the U.S. Federal Central Bank and Treasury Department quickly stepped in and look to have appeased investors concerns. They protected depositors and intimated rates would not need to rise, or at least as fast as previously considered. The broader indexes have since improved, but most have not yet returned to their recent highs.
But that cannot be said for all. Surprisingly, Growth Stocks and Gold have now already returned to their six month highs. It is there we focus.
We are in the Green Zone in all of our short and long term indicators right now. That may seem surprising given all the events and concerns in the world. There will be continued volatility, but with a close eye on currency, and maintaining tight stops, we can better navigate and take part in what is now the strongest part of the market. Thus, we have made a shift towards the Growth stocks, those that took it hardest last year, as they are now climbing the wall of worry. How do we know that?
There is considerable confusion as to where markets go from here. All of the news and pundit commentaries continue to be negative – partly because bad news sells – but especially regarding inflation and rates, including the U.S. and global banking concerns. There is also the problems and devastation caused by the invasion of Ukraine and the worries of rhetoric out of Russia, China, North Korea and Iran. Furthermore, there is more bad news in France with strikes and uprisings. We could go on and on…
So even with all these concerns, we are emphasizing our focus on the U.S. Dollar.
As we have mentioned many times, the U.S. Dollar (U.S. cash) and U.S. Government Treasury Bonds (“Treasuries”) are the worlds safe havens. Whether we like it or not, when investors are worried, they sell the lot, and buy U.S. cash and or treasuries. In 2022 when the markets were declining, we saw a big rise and shift towards the U.S. Dollar. The reason for this is the stability the U.S. projects, even with its faults, it is still the single largest military power and economy.
Interestingly, the trend and rise in the US Dollar stopped in the late fall of 2022.
At that point, money started to flow out of the USD. The U.S. currency began to decline versus the major currencies of the world. Global currency traders began to see that interest rate increases which made the USD more attractive, looked like they may be slowing, and that inflation may be subsiding. Rates and inflation jumped up again in February of this year as many thought the U.S. central bank may be seeing higher inflation still. The rise or expectation of further increases was quelled by the fall of Silicon Valley Bank. The quick rise in rates saw many banks fail to offset their long term investments with their short term obligations to depositors – and resulted in a run on those banks.
With the fall of Silicon Valley Bank, it led the U.S. Fed, central bank, to instead reconsider and not raise rates, or at least not as fast as most expected. Many now consider that the Fed may at some point soon begin to reduce rates once again. Bottom line result is that the U.S. dollar and treasuries have now become less attractive - thus the USD falls.
A falling USD is good for stocks, particularly growth company stocks – especially if much of the company income comes from outside the US. Higher valued foreign currency, and a lower US currency, means higher bottom line income. It is similar for commodity companies. Most commodities like GOLD are priced in USD. If the USD is falling, then gold and other commodity prices rise.
As you can see in the charts below, we compare the US Currency (in blue) to both the US Stock Market (in purple) and again in the second graph to Gold. Note that they are very much an INVERSE to each other. As the Dollar increases, both stocks and gold go down as investors flock to the safe haven of the dollar. Even though many also consider gold a safe haven, it has not acted as such vs the dollar. When the USD goes down, stocks and gold generally rise.
The third chart is even more pronounced. The comparison of the US Dollar to Growth stocks (in green) is very important right now as the USD is dropping because inflation and interest rate concerns are decreasing. The safe havens are now less attractive. Growth stocks do well in a lower interest rate environment as it becomes cheaper to do business (less interest costs). If you are a US company where much of the income comes from outside the country, those other currencies are rising versus the USD.
If for no other reason than the move in US currency to the downside, we want to be in stocks, particularly in Growth Stocks and Gold. Therefore, currently we are fully nvested. We still have concerns that there may be more black swans like the banking issue and are watching our new STOPs very closely, for downside protection.
Our final chart is the USD Dollar index versus the Cdn dollar Index. They typically also run opposite to each other, but recently the Cdn dollar did not run up as the US went down. It has been somewhat delayed and that is likely due to the fact that the Canadian Central Bank has not raised rates as much as the US did and therefore our government bond assets were not as attractive. As you can see, that is starting to change as the Cdn Dollar is now going at least somewhat sideways to the US Buck decline. Hopefully for the travellers, that trend continues to improve.
Bottom Line: We are in the Green Zone and fully invested. There will certainly be a recession if we are not in one already – the question is whether it is a soft or hard landing and how the fed reacts to it with interest rate changes. As long as the U.S. Dollar continues to trend down, and U.S. interest rate increases continue to slow, stall or even decline, it is positive for stocks, and particularly Growth Stocks and gold to which we are allocated.
Should you have questions or concerns about the commentary, the markets, or your portfolios, we would be pleased to get together by phone, virtually or in person at anytime.
Have a great weekend!
- John and Megan!