By Daniel McGarvey, Portfolio Analyst
Alongside the remarkable movements of assets like stocks, bonds and commodities this year, the action in currency markets has also been historic. Most notably, the U.S. dollar has strengthened dramatically versus other major currencies, as evidenced by a 16.6% increase in the U.S. Dollar Index.
This strength can certainly be explained by a hawkish Federal Reserve that has continued raising rates dramatically, but another major reason is that the U.S. economy, while in danger of recession, is faring far better than other developed economies in Europe and Asia. These trends should please American consumers, but they hurt exporters and weigh on many domestic stocks, since 40% of S&P 500 revenues are international.
The impact of global developments on domestic companies contributes to a growing realization that participating in a globalized economy can be a large risk in times of stress. This realization was especially brought to light by the pandemic and Ukrainian invasion, and it has led investors to wonder whether this era of globalization could be ending.
Consumers and investors have benefited for decades from the ability of corporations to essentially arbitrage labor costs across borders, but those cross-border relations can become unpredictable when other countries pursue national interests at odds with ours. A reversal of globalization could hamper economic growth and profit margins, but it might be a welcome development for a working class who have been somewhat left behind as jobs are outsourced abroad. As shown below, corporate profits as a percentage of GDP are near record highs while wages as a percentage of corporate GDP are historically low.
The S&P 500 had its fourth positive month of the year in October, ending the month up 8.1% and down -17.7% year-to-date. Third quarter earnings have been underwhelming, with earnings growth that would be negative if not for the energy sector. The 10 Year Treasury rate rose as high as 4.3% before settling at 4.1%, and the 10 Year – 3 Month spread went negative for the first time since early 2020. The Bloomberg US Aggregate Index fell -1.3%, and high-yield spreads tightened to 4.5%. Oil prices are still relatively high, with WTI crude oil rising to around $88/barrel.
Daniel is a Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.