Where the Real Action Is

Investors who are focused on U.S. stocks are missing a lot.

It is true that U.S. stocks are off to one of the strongest starts ever to a calendar year. But savvy investors should be focusing elsewhere, specifically on the weakening U.S. dollar and the international stock markets.

The dollar continues to be weak against most other currencies. It has been so weak that international investors who bought U.S. stocks haven’t done nearly as well as U.S. investors, after converting their gains back to their home currencies. In fact, at the end of the first two weeks of the calendar year, the S&P 500 already has a 3% loss, when priced in euros.

While the S&P 500 began the year with a 5.1% rally, big gains occurred for U.S. investors converting returns from foreign currency back into dollars gains from foreign markets. In such instances, U.S. investors enjoyed gains in Brazil of 9.81%, in China of 8.60%, in Germany of 6.80%, in Mexico of 6.68% and in Italy of 10.74%.

A key reason for those enlarged returns for U.S. investors buying foreign securities stemmed from the falling U.S. dollar. The dollar had its fourth-worst start to a new year, according to Bespoke Investment Group.

The U.S. dollar is likely to weaken further. Cycles in the dollar tend to last years. A bad start to the year typically occurs when the dollar declined the previous year (which happened in 2017) and leads to a decline of over 3% for the new calendar year.

A weak dollar is likely to lead to several other trends.

International stocks will continue to perform well, especially for U.S. investors. U.S.-based investors will enjoy both currency gains and stock market gains by investing overseas. U.S. investors have been moving money steadily overseas in the last year or so, and that trend should continue.

Another trend will be the continued weakness in U.S. treasury bonds. Foreign investors will want to own fewer of these bonds if the dollar continues to fall, and they’ll also want to own fewer as U.S. interest rates rise. Long-term treasuries already are down almost 3% for 2018, and intermediate treasuries are down more than 1.5%.

Finally, a weak dollar could provide a headwind for U.S. stocks. Again, overseas investors will be less willing to own U.S. stocks if the dollar is declining. Match a falling dollar with strong overseas markets, and most international investors don’t have a strong case to own a lot of U.S. stocks.

On the other hand, a weak dollar is likely to increase revenues and earnings for U.S. multinationals. That could establish a floor on U.S. stocks.

In 2017, U.S. investors who focused on their home country did well, but they would have earned more by increasing their international allocations. That’s likely to be the case again in 2018.

The Data

The Richmond Fed Manufacturing Index dipped again, receding from a multi-year high reached in November. The index came in at 14, down from 20 last month and 30 in November. This still is a positive reading, indicating growth but at a slower rate than last month.

The Kansas City Fed Manufacturing Index increased to 16 from 14. Unlike the other regional Fed surveys this month, this one indicates the rate of growth increased during the month.

The PMI Composite Flash Index for January found higher rates of growth in both manufacturing and services, causing the composite to increase to 53.8 from 53.0. The indicator points to moderate growth continuing.

Once again, the housing data were mixed.

Existing home sales declined by 3.6% for the month after a 5.1% increase last month (revised down from an initial 5.6% increase). Over 12 months, sales increased 1.1%. The report indicated that the biggest reason for sluggish sales is a lack of inventory of existing homes available for sale. Prices declined 0.2% for the month, making for a 5.8% 12-month price increase.

The FHFA House Price Index reported that prices increased another 0.4%, following a 0.6% increase last month. The 12-month increase is 6.5%. In this index, house prices have been strong for several years.

New home sales declined 9.3% in one month, and the previous month’s sales were revised down from 733,000 to 689,000. Even so, the report was a good one. Last month’s sales were the highest since the 2008 financial crisis, even after the revision, and this month’s sales number is the fourth highest since the crisis. Sales are up 14.1% over 12 months, and prices are up 2.6%. Most importantly, the inventory of new homes for sale is increasing, which is likely to increase sales in the coming months.

The Index of Leading Economic Indicators from The Conference Board increased a hefty 0.6%, indicating there’s no recession on the horizon.

New unemployment claims increased 17,000, but last week’s 41,000 decline in new claims was revised to a 45,000 decline. That established a new 45-year low of 216,000 weekly claims.

Consumer Sentiment, as measured by the University of Michigan, continues to decline from its post-crisis high reached last fall. Last week’s reading was 94.4, which is the lowest in six months. The current conditions component of the index is at a 15-month low. Even so, the overall level is still in the positive zone, and the future expectations components of the report were at high levels.

The Markets

The S&P 500 rose another 1.28% for the week ended with Wednesday’s close. The Dow Jones Industrial Average returned 0.63%. The Russell 2000 increased 0.86%. The All-Country World Index added 1.48%. Emerging market equities soared 2.86%.

Long-term treasuries fell another 1.47% for the week. Investment-grade bonds dropped 0.42%. Treasury Inflation-Protected Securities (TIPS) lost 0.23%. High-yield bonds dropped 0.24%.

The dollar declined 1.52%.

Energy-based commodities returned 2.15% for the week, while broader-based commodities rose 2.35%. Gold increased 2.19%.

Bob’s News & Updates

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