The struggling greenback is a symptom of a problem. It is the first line of attack when the rest of the global economy senses dysfunction. Even the recent runs to new all-time highs in the Dow and S&P were done with little depth and without wide participation. Most of the run was attributed to a couple of stocks. Case in point: The run from Dow 21K to 22K had Boeing responsible for roughly 400 points of that move. That is narrow leadership. The Nasdaq market, with the high-flying FANG stocks, seems even worse with those few stocks running the index up 20 percent in a few months of this year.
Make no mistake, stocks are heading for a pullback. The real question is will this how deep will it be. That will depend on the headlines coming out of DC. The linking of politics and the markets has left capital vulnerable to headlines which can cause a move of one or two standard deviations. In other words, we are one headline or tweet away from a 500 to 1000-point move either way in the Dow.
The deception in the markets is in the fact that corporate profits look as if they are getting better and the market is pricing in another bump in revenues. But that same profitability is only possible if the dollar were to move down another 9 or 10 percent. Is that something we really want?
Without a stronger dollar, these moves in the stock market don't mean as much. It's a slippery slope. We want multi-national corporations to show strong numbers but we need a strong dollar for longer term strength and international trade. Weak currencies weaken nations; that is a fact. A falling dollar might look good for an earnings period but is fatal in the long run for corporations and the nation. Worse yet, a deteriorating currency is indicative of global players losing confidence in DC.
As I wrote earlier, the market has hit an inflection point. With the first few months behind him President Trump must get to the point of leading towards legislative print to enact his pro-growth policies. If he is distracted from that mission, the dollar and the markets will suffer. We can't depend on a falling dollar for further gains in stocks. There are only a hand full of days which congress will meet after returning from the August vacation (Not a recess!) and they must get to work.
Unless the markets see action out of our legislators and executive quickly, look for the road to be a difficult one for stocks for the rest of the year. Right now, the market is lacking real leadership. Bull moves in stocks are great but it's always nice to leave a party a little early. Time for protection into the tough months ahead. Is it a three to five percent pullback or a 10 percent correction...Stay tuned.
Commentary by Jack Bouroudjian, CEO of Index Futures Group LLC, a registered independent broker, and CIO of Index Capital Partners, a registered commodity-pool operator. He was also a three-term director of the Chicago Mercantile Exchange and founder and advisor of UCX (Universal Compute Exchange). Follow him on Twitter @JackBouroudjian.
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