The most important story in finance isn't what anyone thinks.
Bank blowups keep making headlines... The Federal Reserve keeps hiking interest rates... And the threat of a recession keeps haunting us.
Most folks would name one of those stories as the key to where the market will go from here. But they'd be wrong...
The biggest story since stocks bottomed in October has been the U.S. dollar.
The dollar hit a 20-year high last year. But it has since been on a steady decline. And that's the key reason stocks and commodities have been rallying.
When the dollar is rising, stocks and commodities tend to fall. And when the currency is falling in value – like it has been lately – these assets tend to rise.
Importantly, the currency's recent slide isn't over yet. The dollar's decline just hit a rare level. And we expect the downtrend to continue.
Let me explain...
No matter how strong a trend is, nothing goes straight up forever. A powerful upswing will have a break here and there.
The opposite is also true. A downtrend almost always includes some relief rallies. But the falling dollar has made a rare move over the past two months...
The currency recently declined in seven out of eight weeks. That's a consistent downtrend. And similar moves have happened just 1% of the time over the past 50 years. Take a look...
The worst of the decline happened in late 2022 and early 2023. The dollar rallied for a few weeks... before it started to slide again.
According to history, this consistent drop means we should expect the dollar to keep falling. Here's what the currency has done after similar moves...
Currency fluctuations can cause major headwinds or tailwinds for investors... But they tend to happen at a glacial pace. And over the past 50 years, the dollar has largely gone nowhere.
Instances like today's have led to more declines in the dollar, though. After similar cases, the currency typically dropped 0.6% six months later... And it fell 1.3% a year later.
Those might not seem like huge declines. But they're significant for a slow-moving currency. This shows that the recent downtrend will likely continue. Plus, in the worst case after a setup like this one, the dollar dropped 16% in a year.
This signal is even stronger because of another recent move in the dollar... The currency just fell below its 52-week moving average. (This just takes the average of the past 52 weekly closes to build a trend line.)
When the dollar drops below its 52-week moving average, it loses an annualized 9.3% per year, based on history. That's a massive decline for an asset that goes nowhere over the long term.
No matter which signal you look at, the trend is down. And that means the dollar will likely keep falling from here.
The rapidly rising dollar was a headwind for stocks, commodities, and just about every U.S. asset last year. That's over now. The dollar should keep falling... which is a good reason to stay bullish right now.
The falling dollar is one bullish indicator for stocks. But a few other measures are important to watch today. When they all line up, it will be a strong signal that the bear market is finally in the rearview mirror... Learn more here.
"Fighting the trend is rarely the right move," Sean Michael Cummings writes. Right now, the bond market is betting on a recession. The stock market disagrees. But a recent move in prices gives us a hint at what these conflicting signals mean... Get the full story here.