Current headlines are understandably focused on the surreal volatility in equities these past few weeks, but extreme moves in equities may ultimately prove to be a trivial distraction from what is happening with the U.S. dollar.
Amid the waterfall declines in stock prices, together with collapsing oil prices, the dollar is not rising. While the S&P 500 had fallen 16% from Dec. 3 to Dec. 26,and oil was nearly cut in half since October, the U.S. dollar index has been up and down, but static overall.
Investors may ask, so what? One would think the world’s reserve currency should rise on forex markets in the context of extreme stock market and oil downside action. It’s just not happening now.
Leaving oil aside for a second, a falling stock market together with a falling dollar is rare enough on its own. It has happened before, on par with what we are seeing now, just very rarely this century. January 2008 was one example, when we saw a similar 16% drop in the S&P 500 that month, from a high of 1,472 to a low of 1,270. During that month, the dollar index also fell 3%. That was also the beginning of the Great Recession, though we didn’t know that officially until later in the year.
The only other time since 2008 that we saw a serious decline in equities along with a falling dollar was during the week of the August 2015 flash crash. There was an 11% move down in the S&P from Aug. 18 to Aug. 25, top to bottom, together with a 3.8% move down in the dollar. Other than that, major declines in the S&P 500 have been coupled with moves up in the dollar. We could arguably discount the 2015 fluke as an extremely short-term panic that a single week and did not portend a lasting trend for either equities or the dollar. That puts us down to January 2008 as the only time falling stocks and a falling dollar has happened for any semi-sustained period of time since 2000, until now.
If we go back before 2000, falling stocks with a falling dollar also happened from January 1973 to September 1974, the dreaded stagflation years, when the S&P 500 saw a 50% bear market and the dollar fell over 4%. Then, in 1990, during the First Gulf War, it happened again. But what the 1973 and 1990 bear markets have in common besides a falling dollar was a spiking oil price, certainly not a collapsing one.
Fast-forward to now with this context in mind. Now we have something new - a collapsing oil price of 45% from Oct. 3 to Dec. 24, a technical S&P 500 bear market and a static-to-falling dollar index. From peak to trough of the most recent oil collapse, Oct. 3rd to Dec. 24th, the dollar had risen less than 1%. From peak to trough of the current S&P 500 bear market, the dollar index is almost exactly unchanged, from a high of 95.75 on Oct. 3 to a low of 95.74 on Dec. 28.
If the dollar can't show strength now, what happens when oil and stocks recover?
One final note before panicking out of the dollar. This cannot be called a sustained trend yet. October to December is still too short a time frame for that, but what is currently unfolding with the dollar needs to be monitored closely. What happens to the dollar when oil recovers will be key. As of now, though, it doesn’t look good for the world’s reserve currency.
Disclosure: No positions.
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