Can The US Dollar And Stocks Work Together?

1.) S&P 500 vs. OIL – I’ve pointed out how in the two previous instances where we experienced a massive spike in oil (2008 and 2022), the stock market in general didn’t like that and didn’t do well afterward. But here’s a longer-term picture with smaller price peaks to also bring that into a larger data set. Since at least 1970, the primary fallout for the stock market from any major oil price spike generally begins AFTER oil prices peak. The 64 million dollar question, of course, is if oil prices have actually peaked! I’m not sure they have. Oil (WTIC) is definitely exhibiting some characteristics of an asset class that wants to rally some. And as I pointed out yesterday, if that were to happen, a lot of traders would be very offside with their large short positions. Wouldn’t that be just like Mr. Market? The greater degree of pain for traders in oil right now is up. Mr. Market knows where the pain points are and how to exploit them.

2.) US DOLLAR – I mentioned yesterday that typically, a strong dollar doesn’t bode well for the stock market, mostly because a rising dollar is a result of a flight toward safety. Stocks have historically tended to do better with a weaker dollar. The question is if something is changing since the US Dollar Index broke out a few days ago. This is where things start to get interesting. Today, stocks remain near all-time highs, and participation continues to broaden across the market. Investors are still favoring risk, yet the U.S. Dollar Index (DXY) just closed at a new 52-week high. That’s not how things usually work. Maybe it’s acting as an early warning signal. Maybe money is starting to move toward safety before weakness in stocks becomes obvious to everyone else. If that’s what’s happening, then a stronger dollar deserves our attention. But there’s another possibility. Maybe this move is simply a rally within a larger downtrend. Or maybe we’re entering an environment where both stocks and the dollar can thrive at the same time. That’s happened before. During the second half of the 1990s, investors around the world wanted exposure to American assets. They wanted U.S. stocks. They wanted U.S. technology companies. They wanted dollars. Capital poured into the United States, and stocks and the dollar benefited. That could be happening again with American dominance in AI. A stronger dollar doesn’t always mean fear. Sometimes it means demand. Sometimes it means capital flowing toward opportunity. Sometimes it reflects confidence rather than caution. We’ll see.

3.) VALUATION vs. PROFITABILITY – At today's record margin levels, the model would typically point to a valuation closer to 23x earnings. Instead, the market is currently trading about 1.5 standard deviations below its long-term regression trend. That’s good news in that price still has room to catch up to profitability.