The strong U.S. dollar continued to rock the stock markets last week. Since last June, the U.S. dollar has rallied more than 23% against a group of currencies, and it’s up about 12% against the euro so far this year.
As a result, commodity prices and multi-international companies’ profits are being steamrolled — and that’s putting pressure on stocks in the S&P 500.
The S&P 500 dropped more than 1% last week and slipped through its 50-day moving average on Tuesday. Many investors and market pundits alike viewed this as a bad omen, but a quick look back in history, and it’s apparent this action is actually a strong positive for the stock market.
Since March 2009, when the bull market started, the S&P 500 has broken its 50-day moving average 17 times — and it’s still going strong! On average, when the S&P 500 slips through its 50-day moving average, it goes on to gain 1.92% in the next month. Clearly, the stock market is oversold in the near term and a good long-term buying opportunity has emerged.
Unfortunately, it’s not a good buying opportunity for most multi-international stocks. I’ve noted on several occasions that the S&P 500’s first-quarter earnings are going to be dismal.
I’m looking for fist-quarter earnings to be down about 2% after you consider earnings surprises and stock buybacks. However, the S&P 500’s first-quarter earnings are widely expected to fall 3.6%, and some are predicting much worse.
MarketWatch reported last week that the S&P 500 will not have positive earnings for a single quarter in 2015! It predicted that the S&P 500’s forecasted earnings losses would grow progressively worse as the year wears on and ultimately decline more than 20% in the fourth quarter of 2015. Ouch!
In addition, several multi-international companies have already warned that the stronger U.S. dollar is going to continue to pinch profits — and many have issued lower guidance for the first quarter. As a result, there are two ways this could play out…
- A flight to quality will accelerate as investors flock to stocks with positive sales and earnings growth.
- The stock market will melt down, as investors “freak out” when they realize deflationary forces from the strong U.S. dollar are destroying corporate profits.
Personally, I think first scenario is most likely. The S&P 500 continues to yield more than a bank and money market investments. So, high dividend stocks and companies will real earnings growth will remain an oasis.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
