This Is Why The Dollar Will Rally This Year

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

This Is Why the S&P 500 Will Rally Big Into the End of 2020

The stock market looks ready to rally more than 5% into the end of the year

The stock market has been on an epic run. Since the 2008 Recession, the S&P 500 has gone on its longest bull run ever and has risen by more than 300% during that stretch.

But, with the S&P 500 at all-time highs, many market observers are worried. Rising trade tensions have some concerned about a global economic slowdown. A strong dollar has others concerned about international demand headwinds. Some are worried about rising debt levels, while other pundits are concerned about valuation.

Needless to say, eventually those bears will be right. We’ve been on an economic and market uptrend for a decade now. Eventually, a black swan will appear, end that uptrend, and markets will fall.

But, those bears won’t be right today. Nor will they be right tomorrow, or any day soon.

For the foreseeable future, this market will only grind higher, led by the giants who got it here. Given reasonable valuation levels, strong economic growth and a healthy consumer, I reasonably see the S&P 500 hitting 3,100 by year end, implying another 5%-plus upside over the next three months.

The Economy Is Healthy

Perhaps the No. 1 reason that the S&P 500 will continue to grind higher is that the economy is healthy right now, and projects to be healthy for the foreseeable future.

U.S. GDP growth hit 4.1% last quarter, the fastest growth rate since 2020. A large part of this has to do with tax cuts, but it also has to do with the economy finally and fully shaking off the rust from 2008.

Many pundits expect this economic expansion to end given the historical fact that expansions don’t normally last this long. But, the recession that preceded this expansion was also larger than usual, and often considered to be the worst recession since 1929. Following the Great Depression, the economy’s cumulative GDP growth from 1934 to 1944 was over 100%.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Since 2009, cumulative GDP growth in the U.S. has been under 10%. Thus, in historical context, this economy really hasn’t come that far since the Great Recession, and further gains look sustainable.

The Consumer Is Strong

The biggest part of the U.S. economy is consumer spending. So if you want to know where the economy is heading, look at the consumer.

Right now, the consumer is very strong. Consumer confidence is at near two decade highs, while consumer spending is robust with retail sales up 6% year-over-year over the past three months.

This robust consumer strength should persist. By most metrics, the consumer isn’t overstretched. The personal savings rate is at 6.7%, way above where it was before prior recessions. Meanwhile, household debt to GDP is below 80%, far off the near 100% levels it was at in 2007-08. Thus, the consumer has plenty of firepower to remain strong for the foreseeable future.

So long as the consumer remains strong, the economy should remain strong. So long as the economy remains strong, the S&P 500 should head higher.

The Leaders Are Still Growing

The market is nothing more than a composition of a bunch of companies. Fortunately, the biggest companies in the market also look healthy and strong here.

The stocks that led the market here are the big tech names, like Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Apple (NASDAQ: AAPL ), Netflix (NASDAQ: NFLX ), Nvidia (NASDAQ: NVDA ) and Alphabet (NASDAQ: GOOG , NASDAQ: GOOGL ). All of those companies look good here and now. Valuations are mostly reasonable, and where they aren’t obviously reasonable as is the case with Netflix and Amazon, growth is huge.

Also, many would argue that the class of “Junior FANG” stocks like Square (NYSE: SQ ), Shopify (NYSE: SHOP ), Twilio (NASDAQ: TWLO ), Axon (NASDAQ: AAXN ) and others are just getting started. There are also the red-hot cloud kings like Salesforce (NYSE: CRM ) and Adobe (NASDAQ: ADBE ), which aren’t showing any signs of weakness, and a big rally playing out in retail thanks to consumer strength. High-impact retail stocks like Walmart (NYSE: WMT ), Target (NYSE: TGT ), Costco (NYSE: COST ), Home Depot (NYSE: HD ), Macy’s (NYSE: M ) and Nordstrom (NYSE: JWN ) have all been big winners recently.

Overall, between tech and retail, it looks like there is enough fundamentally driven firepower to keep the market in rally mode for the next several quarters.

The Valuation Is Reasonable

The biggest knock against this market is valuation, as the widely followed Shiller price-to-earnings multiple is at levels not seen since the Dot Com Bubble.

But, the Shiller P/E multiple incorporates noise from 2008 and doesn’t incorporate tax cuts, so it is rather meaningless in the big picture. If you throw out 2008 noise and incorporate tax cuts, the valuation picture becomes much more positive.

Since 1995, the median trailing earnings multiple in the S&P 500 is nearly 22. But, that includes a bunch of big multiples from the Dot Com Bubble and some abnormally high trailing multiples during 2008-09. If you exclude those time periods, the median multiple for the S&P 500 since 1995 is roughly 19.

Earnings this year for the S&P 500 are expected to come in around $162 per share. Applying a median 19 multiple on that, you arrive at a reasonable year-end price target for the S&P 500 of nearly 3,100.

Bottom Line on the S&P 500

Eventually, the bears will be right about the stock market. But, not today, not tomorrow and not anytime soon. Over the next several months and quarters, the outlook for this market to head higher is quite favorable thanks to economic strength, consumer strength, single-stock strength and reasonable valuations.

As of this writing, Luke Lango was long FB, AMZN, AAPL, NFLX, NVDA, GOOG, SHOP, ADBE, WMT, COST, HD and M.

4 Reasons Why USD’s Incredible Rally Can Last

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was a great day to be long U.S. dollars. The greenback traded higher against all of the major currencies in a move that took USD/JPY to its strongest level in 11 months. The Australian dollar was hit the hardest by the dollar’s rise while sterling was the most resilient. Wednesday’s move was driven by the classic story of economic dominance. The largest economy in the world is growing the fastest. While economic reports from around the world surprised to the downside, U.S. data is consistently beating expectations and reinforcing the positive momentum. According to the latest reports, service-sector activity expanded at its fastest pace in more than 20 years. The details of the ISM non-manufacturing report showed broad-based improvements in prices, new orders, backlogs and employment. In response, the 10-year US Treasury yields jumped to their highest level in 7 years and this move played an important role in driving the US dollar higher.

Looking ahead, there are a few reasons why we think the dollar’s rally is durable:

1. The US economy is strong and nonfarm payrolls will confirm thatThe employment component of the non-manufacturing ISM report rose for the third consecutive month and this uptick suggests that payroll growth could exceed 200K in September

2. Hawkish Fed commentsA number of Fed officials spoke Wednesday and many of them seem see significant upside risk to inflation. Fed Chair Powell in particular believes that the expansion can continue for quite some time. Prices in the service sector increased and there’s a good chance that PPI and CPI will rise as well.

3. There’s no resistance for 10-year yields until 3.5% and that is consistent with USD/JPY rising to at least 115. USD/JPY is trading above the 200-week SMA for the first time since early January and a move like this usually coincides with a 300-400 pip rally from the SMA at 113.00

4. Data abroad hasn’t been great – While the US prints better than expected numbers, the latest Eurozone, UK, Australia and New Zealand were weaker than expected. Until this changes, diverging economic performance is a big reason why the dollar’s rally can’t last.

Prime Minister May’s Tory Conference speech was a major disappointment. Not only did she fail to provide any meaningful updates on Brexit, but sterling barely moved despite her pledge to accept no deal rather than a bad one. UK data was also worse than expected with the PMI services index falling to 53.9 from 54.3. Although some investors may have found comfort in UK Brexit negotiator, Raab’s comment that they hope to have a deal by November, speculative positioning is the main reason for sterling’s resilience. Traders are still heavily short the pound and unless there’s major negative news, they may need some convincing to add to their positions. If leaving the door open to no deal or weaker UK PMIs can’t do the trick, then a reversal would have to be driven by a much better than expected US jobs report .

Why the commodity rally will get back on track

Implications for the US dollar and producers

20 February 2020

Simon Flowers

Chairman, Chief Analyst and author of The Edge

Simon Flowers

Chairman, Chief Analyst and author of The Edge

Simon is our Chief Analyst; he provides thought leadership on the trends and innovations shaping the energy industry.

Latest articles by Simon

China’s energy markets feel the squeeze

3 things to consider before you buy a deepwater rig

Storage, the energy transition’s flexible friend

The automotive sector – twists on the road to transition

Technology may be a game changer for future oil supply

How the big Gulf producers are investing in 2020

Are we in the early stages of a sustained rise in commodity prices? And what does it mean for the US dollar?

We posed these questions a year ago when robust global economic growth was driving commodity demand and the US dollar was starting to tip over from a 15-year high. The two are inextricably linked, though which is the horse and which the cart is not always clear. The recent disruption in financial markets suggests it’s worth a fresh look at the relationship.

Over the past couple of years, there has been a broad improvement in commodity prices, with indices up by around 50% on average since early 2020. It’s been far from uniform, and different commodities bottomed at different times.

Iron ore and oil have seen the most spectacular rebounds, both up more than 100% from their lows.

The fundamentals in each commodity market are very different, but Principal Economist Jon Butcher identifies common factors behind the recovery.

First and foremost is growth in the global economy. GDP growth strengthened from a low of 2.3% in Q1 2020 to a six-year high of 3.1% in Q4 2020. The upswing has been broadly based with growth accelerating across Asia, Europe and the Americas. In 2020, emerging market growth was just 3.7%; this year we expect 4.6%, with China and India driving much of the improvement. This is doubly important for commodity demand, given the resource-intensive nature of emerging market growth.

Then there is the US dollar. The currency dropped 10% on a trade-weighted basis by end-January 2020, from its high of a year ago. The relationship between the US dollar and commodity prices is not straightforward, or indeed constant. But the dollar tends to be inversely correlated with commodity prices; a weaker dollar usually means stronger commodity prices, and that’s what we’ve seen over the past six months.

The fall in the value of the dollar reflects strength in the emerging world rather than a weak US economy.

It’s also sentiment: with confidence boosted by the global economic upswing, investors have shifted capital out of traditional safe havens like US treasuries into riskier assets with potentially higher returns.

Better prospects for growth in major trade partners like Europe and Canada, and with the expectation of monetary tightening in those economies, they have pushed their currencies higher against the dollar. We’d expect continued dollar weakness through 2020 given the prospects for a strong year of global economic growth.

Financial market volatility in the last fortnight has upset the apple cart. Commodity prices have corrected and the US dollar bounced by 4%, taking it back to December levels. US jobs data released on 2 February highlighted tightness in the US labour market.

Associated wage gains prompted fears of higher inflation and raised the prospect of accelerated US interest rate hikes. Uncertainty spiked, and equities and commodities dropped. Increased risk aversion effectively pulled capital back into safe havens like the US.

So, turning point or just a blip? More likely the latter.

Our view is that the global economy is set fair for growth at a healthy pace, perhaps a tad slower than in 2020-18. Developing economies in particular will do well.

This provides a backdrop for a sustained recovery in commodities over the next five years, though each commodity market has its own fundamental story. Oil, for example, is stuck in oversupply for the next two years before the market tightens into the early 2020s.

As commodities gradually recover, the US dollar should revert to gentle decline – though markets adjusting to the end of ‘easy money’ means it will doubtless be a bumpy ride for the currency and commodities alike. If we’re right, then some commodity producers may be on a journey to a better place in the next few years – firmer prices and better margins.

On the other hand, it might not pan out this way. So producers have to learn from this tough down cycle and persevere with the relentless drive to keep costs down so they can still make money even at future cycle lows – and wherever the US dollar travels. That has to be the goal.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Like this post? Please share to your friends:
Best Binary Options Trading Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: