To determine the next strong price dislocation or trend in equity, one must identify factors that have impact now and will continue to have impact in the coming months. Hence, here at Classiarius we are looking for trends, for factors that would contribute to a three-month, or longer, market extension. We found a new one – the strong US dollar that is having negative impact on US globalist corporations.
For months we have focused on overbought or crowded sectors and other technical factors but have added the Fed hike trajectory and the growing concerns about emerging markets as some factors that could trigger an equity sell-off. Evidence is pointing to PE ratios and other factors that suggest markets may have gotten ahead of themselves. Of course, more recently, the trade battles that are turning into a war between the Trump Administration are starting to weigh heavy. The further strengthening of the US labor market surely has several benefits but again, the growing concerns about wage inflation and the Fed response must be factored in.
More recently, the stronger US dollar is now on the table as a factor that is being talked about – and rightfully so – with regards to challenges to global businesses. This strong dollar factor was one that US firms didn`t discuss only three months ago, but more executives at firms such as 3M, UPS, PPG Industries and Anheuser-Busch are openly tabling when ask on financial news programs. They are all saying that a stronger US dollar, for a period of time, will, in the long run negatively impact not only results but their outlook and future performance.
At Classarius, we think the strong US dollar is here and will remain until the end of 2019. Please note our recent article on our front page of our platform that points to USDJPY trading to 117.00 (placed there 2 weeks ago).
The October stock market upset and pullback was long overdue, despite the confidence that many investors have had regarding specific business confidence and the tax-cut windfall. Earnings as reported in our piece last week pointed out that with 30 percent of S&P 500 companies reporting (in terms of market capitalization), 82 percent beating expectations – clearly this indicates a very high degree of confidence. However, these same companies have quietly mentioned on investor and post-earnings conference calls that the stronger US dollar is becoming a factor in making overseas business slightly more expensive. In light of the US rate hikes that are expected, this strong dollar factor will only carry more weight in 2019. Again, this is our view at Classiarius.
Based on comments by Fed officials, they seem to be managing expectations for more hikes in 2018 and 2019 with President Donald Trump protesting along the way. He wants the Fed to slow down the rate hike trajectory, as do many blue chip corporations. The President is not a globalist, but he wants to protect US corporate profits, why? Because they hire more Americans at home when they are profitable. This is one example in which he ties the Fed, global sales and US domestic jobs in red states together – he is clearly working the system.
Companies like 3M, which has sales around the globe, earnings per share estimates include a 5 cent per share hit from currency translation. And UPS, or United Parcel Service said currency fluctuations could result in a $35 to $45 million negative impact in the fourth quarter. So the strong US dollar is being talked about more frequently as it will hurt US corporate profits.
Our strong directional view has not changed.
We at Classiarius are most concerned about the possibility of an all out trade war between the US and China, and of course place a lot of weight on the US rate hike trajectory. Equity markets are overdone and will likely continue to see selling until equilibrium is established – with our downside targets, from recent highs, to be 15 to 17 percent. Once this 17 percent pullback is achieved, we are constructive and bullish again for the S&P 500, the Dow and of course Nasdaq – which in 2 weeks will provide well priced, oversold names.