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Courtesy of Scott Martindale, Senior Managing Director, Sabrient
Basic Materials and Energy have been the leading sectors so far this week, as the overall market continues to seek support, as well as leadership for moving higher. But the dollar seems determined to spoil the party.
Crude oil closed today at $101.32, and the dollar has flattened out a bit after steadily rising most of this month. I believe the dollar’s strength mainly has been due to the announced end of QE2 (freshly minted bills won’t keep flooding into circulation), the sovereign debt woes in Europe, and unrest in so many regions of the world. No matter what you hear about the U.S. losing its status relative to China, when the world looks for leadership, it still looks here first.
However, as the chart illustrates, a weak dollar has been good for stocks, gold, and oil. So, somewhat perversely, market participants tend to root for a weak dollar. The 1-year chart illustrates that stocks, gold, and oil have behaved as virtual mirror images of the dollar (as represented by UUP). Oil got a little ahead of the others during March-April due to worries about supply disruptions, but has now settled in to the same roughly +25% gain, while the dollar is down closer to -14%, over the past 12 months.
Despite the alternately positive and negative news events, economic reports, and earnings announcements that we hear on a daily basis, it seems that, on balance, things are improving. First off, we survived the weekend “Judgment Day” warnings (although with all of the conflicts, tsunamis, tornados, volcanos, and floods that have been devastating the globe lately, I was beginning to wonder). So, we have that going for us. Furthermore, corporate earnings are at all-time highs, despite ongoing problems in the Financial sector, and we know that stock prices generally follow earnings. Valuations are attractive on a historical basis, with 2011 estimates for the S&P 500 indicating a P/E ratio around 14. And there is still plenty of cash on the sidelines, both with investors as well as in the corporate coffers.
Given that a strong dollar has been a drag on stocks, some market participants might be concerned that, once QE2 has ended, the Fed will then start planning for the process…
