RAY DALIO : When USD Down - So Does The Stock Market
(Tue, 28 July 2020). Billionaire investor Ray Dalio believes the U.S. dollar will soon decline. If history is any indication, the U.S. stock market could drop in tandem. Ray Dalio is sounding the alarm on the U.S. dollar amid heightened tensions with China.
Ray Dalio believes the U.S. dollar could soon decline amid escalating trade tensions with China. Historical data shows the U.S. stock market performs poorly when the dollar enters a downtrend. The Federal Reserve is the crucial variable that could prevent another market downturn. Bridgewater Associates founder and billionaire investor Ray Dalio believes the U.S. dollar will soon decline. Historical data suggests the U.S. stock market could fall in tandem.
As geopolitical risks intensified from worsening U.S.-China relations, an increasing number of investors have flocked to haven assets. Gold has surged by 8.3% since July 16.
If the Dollar Drops, Stocks Could Become Vulnerable
Speaking on Fox’s Sunday Futures, Dalio said a capital war between the U.S. and China could be next. The investor emphasized that a trade, technology, and geopolitical war is ongoing. If a capital war is next, he said the U.S. dollar could continue to decline. In the past three months, the greenback has underperformed against major reserve currencies.
Data from FactSet shows that the U.S. dollar index fell 34% from 2002 to 2007. During the five years, U.S. equities underperformed global stocks. With the dollar index up 24% since 2011, U.S. equities have massively outperformed foreign stocks. Since 2011, the S&P 500 ETF trust climbed by more than 13%. In contrast, the MSCI ETF, which tracks global equities, rose by just over 5%.
One Variable That Could Prevent a Simultaneous Decline in Stocks and USD
According to Morgan Stanley strategists, the August FOMC meeting could fuel market sentiment. Strategists anticipate that the Federal Reserve will keep rates low throughout 2020. Relaxed financial conditions could reduce selling pressure in the market and drive appetite for risk assets.
If the FOMC meeting coincides with calming U.S.-China relations, it might be a catalyst for equities in the fourth quarter. The U.S. government is also planning to release a $1 trillion relief package on July 27.
Stimulus and Fed liquidity have fueled the appetite for stocks since the pandemic began. As long as the Fed balance sheet does not massively contract and liquidity remains high, analysts remain neutral entering the fourth quarter.
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