As I have mentioned earlier in another post, one of the key factors that may sink the US stock market is the strong dollar. This should not be a surprise. The stronger the dollar gets, the less attractive American exports become. While 75% of the US economy is internal, that 25% of economic activity created by international corporations has a strong impact on the broader US economy. They go hand in hand. If the US dollar continues to appreciate, that segment of the economy will get hit pretty hard.
We know that US stocks are overvalued, thanks to quantitative easing and the speculative bubble that is pushing the market higher and higher. Why do you think the Dow Jones industrial average seems to hit record highs on a monthly basis? While a lot of the recent downward action in the stock market is due to profit-taking, one pattern is clear. The market is beginning to price in the strong US dollar, and guess what. The US dollar is winning.
If the market is overvalued and the US dollar shows further signs of strengthening, it is a no-brainer as to where the smart money will go. Considering the fact that the US Federal Reserve has sent signals that it will be raising interest rates, expect the dollar to strengthen further and the stock market to keep taking a hit. Don’t expect this pattern to change anytime soon, unless there is a totally unexpected event that catches everybody by surprise.
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