Over the past year, there have been anecdotal and other reports suggesting that the stock market's fortunes are tied to those of the U.S. dollar. As it happens, an analysis of the data seems to bear this out.
In fact, based on a study of the statistical relationship between the monthly returns of the S&P 500 index and the U.S. Dollar index (using 36-month rolling windows), the two measures are about as negatively correlated as they've ever been.
In other words, a strengthening dollar has, more often than not, been accompanied by falling share prices, and vice versa, on a month-by-month basis at least.
That said, the most recent readings suggest the relationship between the two asset classes may be set to change. As we've seen on several occasions over the past four decades or so, when correlation is at or near a historical extreme and the trend shows signs of changing course, it has often heralded a secular shift in the equity-dollar relationship.
That doesn't necessarily mean the reverse of the previous relationship will hold true (i.e., a strengthening dollar equals higher share prices ). More likely, it suggests that each market will increasingly do its own thing.
Under the circumstances, investors may have to look somewhere other than the currency markets for hints about what the stock market might do next.
Yes, the positive correlation will be a declining dollar (thanks to never ending printing machine) with a declining stock market (when investors realize there is no recovery and the double dip is here).
Posted by: AG | March 03, 2010 at 08:44 PM
Perhaps, but I've been hearing about this elusive "declining stock market" for over a year now. Haven't found it yet!
Posted by: John | March 05, 2010 at 08:52 AM