Dollar RULES … for Stock Market Leadership?

Should the prolonged U.S. dollar bull market finally come to an end, the stock market we have all been used to during the last 10 to 15 years is likely to be turned on its head.

For many years, investors have been wondering how long technology and growth stocks will continue leading the stock market. With only a brief intermission during the 2022 bear market, Tech has chronically led the stock market higher for the last decade. Indeed, it has been such a long stretch of domination, investors are left pondering if international stocks will ever again outperform? Whether value investing is still viable, or has it been rendered an antique? Will small caps ever be worth owning again? Why diversify with the equal-weighted S&P when I can just own the Mag 7? And let’s face it, bonds may have had a good moment during the 2020 pandemic stock market collapse, but why should investors ever leave the stock market? Overall, winning in the stock market has become tantamount to owning Tech/Growth stocks.

After a decade, investors legitimately question if this will ever change. Possibly, as this note examines, the U.S. dollar may hold the key to whether and when stock market leadership finally shifts away from tech/growth. Perhaps it’s only a spurious correlation, but movements in the U.S. dollar have long been strongly correlated (both positively and negatively) with several measures of stock market performance. Historically, when the dollar changes direction, leadership in the financial markets has also typically been altered. It’s worth considering the close relationship between the U.S. dollar and stock market leadership, because after a decade of trending higher, the dollar is near an all-time record high and could be close to soon changing its direction.