Stock Market Definitely Doesn’t Like Federal Reserve Interest Rate Hikes, Says mike larsoneditor of Safe Money Report.
After all, the SPDR S&P 500 ETF (SPY) has fallen more than 18% since the start of the year.
The bond market? Same story. The iShares Core US Aggregate Bond ETF (AGG) lost just over 10%.
Gold? After holding up well at the start of the year, the SPDR Gold Stock (GLD) began to lose ground. It was recently down 5% on the year.
And don’t even get me started on bitcoin. It has fallen 57% since the start of 2022.
But there is an investment that love what Fed Chairman Jay Powell is doing. It has just experienced its best month since 2015. It has just reached its highest in 20 years. It’s an absolute rampage against the alternatives in many parts of the globe. His…
The US dollar!
Look at this chart. It shows the ICE US Dollar Index, which tracks the performance of the greenback against the world’s six major currencies. These currencies are the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona and the Swiss franc.
I’ve shown data going all the way back to the turn of the century to give you an idea of just how powerful this movement is. The index has just broken through overhead resistance to reach 108.5, its highest level in 20 years.
So what does the Fed have to do with the dollar? This is because relative interest rates are a key factor in the value of currencies. If one central bank’s benchmark rate is, say, 3%, while another’s is 1%, global capital will tend to flow into the former’s currency and away from that. of the second.
Currently, the US Fed has raised rates aggressively. That includes last month’s 75 basis point move, the biggest increase since the mid-1990s.
Powell & Co. have made it clear that they also plan to maintain hiking rates throughout the year. That potentially includes another 75 basis point move in the meeting that ends July 27.
But the Bank of Japan has pledged not to increase at all for now. Meanwhile, the European Central Bank only forecasts its first rise later this month…and it’s only expected to be a 25 basis point move. This will put US rates well above the rates of other major countries with developed economies. And this inflates the value of the dollar.
What can investors do in response? Well, a rising dollar tends to put downward pressure on commodities and precious metals. It hampers US multinational corporations by making sales in foreign markets and currencies less valuable in dollar terms. It also hurts the value of mutual funds and ETFs that track foreign markets.
So if you’re overloaded with exposure to commodity producers, multinationals, or foreign ETFs, now might be a good time to reduce that. Focus on more defensive businesses with recession-proof businesses and large domestic operations. The names of utilities and consumer staples foot the bill, and you can find my favorites in the safe money report.
Finally, if you are planning or going on vacation to Europe, rejoice! The strong dollar means your greenbacks will go further the second you land in Frankfurt or Rome.
Visit Safe Money Report here.