Editor’s note: Marc Leavy,CFP? is a regular financial columnist for Business Reform Magazine, the leading Christian business magazine with over 100,000 readers. Each issue features practical advice on operating successfully in business while glorifying God.
The market punched through the Dow 9000 barrier this week leaving all major indices above, or near, one-year highs.
A pull back from this high would be expected and seen as a buying opportunity. The markets have risen from 7400 and a drop, or a consolidating sideward move, would be expected and welcomed.
There will be a good bit of resistance in the 9500 range and it will take a while for the market to move through that wall. During the summer investors will begin looking at the 2004 returns that are expected to be strong.
Productivity, and cost cutting are giving stocks most of their gains; hopefully this will lead to an expansion with capital expenditures and job creation. Unemployment did rise, but not as much as anticipated.
The European Central Bank, on Thursday, raised interest rates by half a percentage point in an effort to jumpstart Europe’s struggling economy and slow down the rising euro. The euro rallied anyway and there is concern about what can be done to get the world’s second largest economy rolling.
Our currency is a cause for consternation. Many are asking, can stocks advance in the face of weakening dollar? The answer is they have before. In 1971 when the dollar was untethered from gold through the Bretton Woods system of fixed currency values. Currencies began to float against each other and the record shows no direct correlation between the dollar and stocks.
Equities and the dollar more often have a negative correlation. That is, equities are more likely to go up as the dollar goes down. The table at the end of this discussion, traces major equity moves and comparable dollar moves captured against the yen, the deutschemark and, more recently, the euro.
That late President Nixon, who gave us as many social programs as LBJ, released the dollar from its gold peg in August 1971. Stocks were taking a break from a rally that lifted prices by almost 40 percent from the previous bottom in 1970.
From August 1971 until late 1972, the dollar fell by 6 percent against the deutschemark and almost 12 percent against the yen. At the same time, stocks climbed another 20 percent until 1973.
Nixon’s resignation ushered in Nobel Prize winner Jimmy Carter and double-digit inflation, double-digit prime rates, double-digit unemployment and an energy crises. Was all that the dollar’s fault – I think not.
Stocks did come back in 1973, as the dollar continued its slide. Stocks plunged in the mid 70s but currency prices seem to stabilize showing no positive correlation.
In 1977 and 1978 the markets slid as the dollar fell but following that markets rallied 36 percent in 1978, 1979 and 1980 as the dollar remained weak. Overseas economies weakened going into the 90s, as ours remained strong. Our dollar continued to rally and overextended itself and is now going through a bit of a correction.
The two main arguments against a weak dollar are that 1) Foreigners will come over and buy up our country and 2) Foreigners will lose faith in our currency and sell their dollars. I know I am oversimplifying but isn’t that the way the free market works? Foreigners will only buy up our country if Americans sell. Americans will only sell to foreigners if other Americans decide not to buy the same asset. There had to be an absence of American buyers for Rockefeller Plaza to be sold to the Japanese. As the yen devalues against the dollar, Americans call up the Japanese and say, “How many dollars do you want for that Plaza?”
When all is said and done, the invisible hand, enlightened self-interest, will guide us.
Marc Leavy, CFP? is a Certified Financial Planner. Principled Investing teaches Solomon’s principles of investing and offers wisdom regarding comprehensive financial planning for a fee. You may contact Marc at [email protected] or visit www.principledinvesting.org.
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