Market Insights: Is a Weaker U.S. Dollar Index a Positive Signal for U.S. Equities?

Macroeconomic and Market Developments:

• North American markets were mixed this week. In Canada, the S&P/TSX Composite Index was up 0.70%. In the U.S., the Dow Jones Industrial Average declined 2.70% and the S&P 500 Index decreased 0.66%.
• The Canadian dollar increased slightly this week, closing at 74.77 cents vs 74.65 cents last Friday.
• Oil prices rallied this week. U.S. West Texas crude closed at US$81.31 vs US$79.86 last Friday, and the Western Canadian Select price closed at US$58.08 vs US$56.87 last Friday.
• The gold price rose this week, closing at US$1,926 vs US$1,920 last Friday.
• The Canadian Consumer Price Index (CPI) rose 6.3% from December 2021 to December 2022, slower than the 6.4% gain that had been expected and down from the 6.8% annual pace in November. On a monthly basis, the CPI fell 0.6% in December, the biggest monthly drop since April 2020. The core CPI, excluding volatile energy and food, came in at 5.15% vs expectations of 5.05%.
• A U.S. measure of inflation fell as well. The Producer Price Index (PPI), a measure of wholesale prices, declined 0.5% for the month of December compared to expectations of a 0.1% decline. Excluding food and energy, the core PPI measure rose 0.1%, matching estimates. For the year 2022, headline PPI rose 6.2%, still high but considerably lower than the 10% annual increase observed in 2021.
• Average Canadian home prices fell a record 12% in 2022, according to the Canadian Real Estate Association, while also forecasting a further 5.9% slide in 2023 before a 2024 rebound. Alberta bucked that trend, with the average house price in Calgary increasing by 8.6% in 2022. The worst performing housing markets in Canada were in Ontario, the worst being Hamilton-Burlington down 21.0% for the year.
• Bank of Montreal (BMO) announced that it has received all regulatory approvals required to complete its previously announced acquisition of San Francisco-based Bank of the West from French bank BNP Paribas. BMO anticipates the acquisition will close on February 1, subject to the satisfaction of customary closing conditions.
• Information on the health of the U.S. economy released this week was consistent with a slowing economy. Retail sales declined 1.1% in December, slightly below the expected decline of 0.9%, but are up 6.0% compared to a year ago. Also, industrial production fell 0.7% in December, much worse than the expected decline of 0.1%, marking the third consecutive month of contraction in industrial activity.
• Netflix (NFLX) jumped on Friday after releasing earnings after the close on Thursday. Netflix added 7.66 million paid subscribers during the fourth quarter, much higher than the 4.57 million expected by analysts. In addition, the company announced that its founder Reed Hastings is stepping down as co-CEO and will assume the role of executive chairman.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer titled Our Plan For If or When Bad News Becomes Bad News: Dwyer VLOG

 

Weekly Diversion:

Check out this video of a heartwarming proposal.

Charts of the Week:

After trading at a 20+ year high in late September, the U.S. Dollar index has now declined over 10%. The U.S. Dollar Index measures the relative strength of the Greenback to a basket of six other influential currencies including the Loonie. Here is a chart showing the performance over the past year.

Source: Bespoke Investment Group

This most recent 10%+ decline represents the sixth time in the past 43 years that the U.S. Dollar Index has declined over 10% after hitting a five-year high. The positive news is that in all five prior occurrences, the S&P 500 Index has been higher one year later. The following chart shows all six instances, and the subsequent table shows the S&P 500 performance following this signal. Let’s hope this provides a jump start for equities. For U.S. multinational companies, a weaker US Dollar means sales generated outside of the U.S. exchange at a more favourable rate. With U.S. large caps increasing exposure internationally, a weaker dollar should act as a nice tailwind to operating earnings. We will see if that plays out this time.

Source: Bespoke Investment Group

DISCLAIMER: Investing in equities is not guaranteed, values change frequently, and past performance is not necessarily an indicator of future performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group.