On Wednesday the Federal Reserve Open Market Committee aka FOMC or simply ‘The Fed’ concluded their two-day meeting. Despite the media hype that this was to be one of the most important Fed meetings of all time, it turned out to be substantially less than that. As we expected, the Fed mostly did nothing and said even less. To our ears what Powell said essentially was that they maybe are not as sure as they had been about the state and speed of the recovery from the pandemic economy. What got everyone’s attention was that they backed away a bit from the use of the word ‘transitory’. Not that the markets ever jump to premature conclusions (ha-ha), that led to an initial reaction that Powell & Company were more hawkish, meaning more skewed towards tightening policy. Stocks sold off. Bonds sold off. Gold sold off. The dollar rallied. Ugly day in the markets.

Thursday, the view was that Powell & Company were dovish, meaning they are less inclined to tighten policy. Stocks were bifurcated. Cyclical stocks were hammered. Technology jumped. Bonds soared. Gold fell. The dollar rallied. Another ugly day in the markets.

Suggestion: Don’t focus on the news. Watch the reaction — which isn’t usually this crazy. Although this is an outlier, let’s continue to watch the reaction. After all there is still more dust in the air than what has settled on the ground. So far, it’s clear that the dollar has benefited the most and gold has been hurt the most on a relative basis. That trade may reverse on Friday, if only for a day or two.

Let’s keep an eye on how the various markets behave on Friday and into next week. Thursday had the feel of a massive reallocation. Friday (triple witching day today!) is a huge quarterly derivatives expiration. Stocks are in a very weak seasonal period. Lots of crosscurrents here.

Our client portfolios have been transitioning to Large-Cap and Growth as evidence emerges that inflation for now, may indeed be ‘transitory’. Our sector strategy has held firm in financials, energy and materials which were hit hard on Wednesday and Thursday. It also owns commodities and some ‘mega-cap’ tech.

The bull market isn’t over, so no one needs to ask that question. The period of digestion continues, something we have discussed often. It’s okay. More new highs will most likely follow.

 

Ron’s Market Minute – It’s About the US Dollar

 We’ve now seen five days in a row that the US dollar got stronger; possibly reversing its longer-term downtrend. 

 Moving down to the consumer level, the stronger dollar is good news for U.S. tourists and can make it less expensive to travel abroad.  On the flip side, a stronger U.S. dollar can mean weaker profits for some big, multinational U.S. corporations. A number of companies, from Oracle to Accenture, have acknowledged that the strength in the dollar could negatively affect their bottom line.

 The rising dollar can cut into profits at U.S. corporations that sell goods and services abroad in a couple of ways. First, U.S. companies operating abroad are paid in a foreign currency, so when these companies bring home foreign revenues, the conversion back to U.S. dollars means profits are worth less. The second issue is a longer-term concern: a stronger dollar means those goods and services are more expensive for foreign buyers, which could eventually curb demand for U.S. products.

Certain stock sectors can have even more exposure. Energy and materials generally have over 50 percent of sales coming from overseas, and the expectation is that they will see an impact on their current earnings reports.

So, we are looking at potential moves toward more US-based areas, and those that benefit from a stronger dollar. These include US-based tech and communications areas.

 In addition, although investor dollars are currently moving toward larger companies, as the dollar strengthens, smaller companies (mid and small-caps), which have more domestic revenues than foreign revenues, will be a potential addition to client holdings. 

Unless you spend a lot of time traveling the world, you likely don’t think much about the dollar’s strength but in markets, it’s a big deal!

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-3638786-061821

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Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

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