The dollar is breaking higher
Rates are rising with it
Stocks can still win
The dollar is ripping.. and this time it isn’t happening by itself.
The U.S. Dollar Index traded around 102.4 this morning, up from 98.8 less than a month ago. Over roughly that same stretch, the 10-year Treasury yield has climbed from about 4.80% to 5.33%.. an increase of more than 50 basis points.
That’s a big deal in the bond market.
A stronger dollar and higher rates both represent tighter financial conditions. They raise the hurdle rate for capital, put pressure on some valuations, make U.S. assets more expensive for foreign buyers and create another headwind for companies with significant overseas exposure.
If I were looking at those two charts in isolation, I’d tell you the market has more weight to carry today than it did a month ago.
But we aren’t looking at them in isolation.
The S&P 500 and Nasdaq just made new all-time highs.
That’s the part I don’t want to lose sight of.
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Our friends at The Chart Report spotted a great analog
Our friends at The Chart Report published this chart over the weekend, and I think it’s a useful way to think about the current setup.
The dollar’s path during Trump’s first term looks surprisingly similar to what we’re seeing now.
The first year weakened. The second year built a bottom. Then the dollar turned higher.
I don’t use historical analogs as predictions and there’s no law saying the current dollar has to follow the exact same path it took eight years ago.
But the analog is useful for another reason:
A rising dollar is not automatically a death sentence for stocks.
The S&P 500 gained 18.7% in 2017, even as the Federal Reserve raised interest rates three times. In 2018, stocks were still up roughly 8.5% for the year by October before the late-year selloff arrived.
The point isn’t that stocks ignored the dollar forever.. they didn’t.
The point is that markets can absorb a stronger dollar and rising rates for much longer than people expect when earnings, liquidity, leadership and risk appetite remain strong enough to offset them.
That’s what I’m watching now.
Rates are helping drive the dollar
The relationship between the dollar and the 10-year has become difficult to ignore.
Over the last month, their daily levels have had roughly a 0.93 correlation.
That does not mean one mechanically causes the other.
But economically, the relationship makes sense.
Higher U.S. yields make dollar-denominated assets more attractive relative to alternatives. Capital has an incentive to move toward the higher return.. and that demand can support the currency.
At the same time, inflation concerns, higher oil prices and increased Treasury supply have pushed long-term yields back toward levels we haven’t seen in decades. The 10-year was around 5.32%–5.34% this morning, while the 30-year pushed above 5.7%.
That very much screams further tightening may be needed.
I’m not going to pretend it doesn’t matter just because stocks are working.
This is why our Market Blueprint still says “Participate Selectively”
This is exactly why I like having a framework instead of trying to reduce the market to a single chart.
The Market Blueprint looks at direction, participation, rotation, financial conditions and risk appetite together when deciding how aggressively we want to take risk.
Right now, several parts of that picture remain extremely constructive.
The major indexes are in uptrends. We’re at record highs. Technology and the Mag 7 continue to lead.
Our trades aligned with that leadership have been working.
But Step 4 - Financial Conditions - is not giving us an all-clear.
The dollar is strengthening.
Rates are rising.
That’s why the Blueprint remains:
PARTICIPATE SELECTIVELY.
Not risk-off. Not hide in cash.
And not throw every dollar we have at every breakout.
There’s an important middle ground.
A Headwind Is Not a Stop Sign
This is where I think traders get themselves into trouble.
They see one bearish input and assume everything else eventually has to bend to it.
Dollar up? Stocks must fall. Rates up? Stocks must fall. Breadth weak? Stocks must fall.
Markets are rarely that clean.
The trend is still higher while financial conditions are getting tighter. Both can be true at the same time.
So the plan is simple:
Respect the bull market. Watch the dollar. Watch rates. And stay nimble.
Follow the money,
Hamilton
Founder, The Trading Initiative
P.S. — The Market Blueprint is how we work through conflicting evidence like this inside The Trading Initiative. We don’t need every indicator to agree. We need to understand the environment, identify where leadership is developing and find trades where the risk makes sense. If you want the Trade Desk, our research, trade alerts and live coaching as we work through these decisions together, join TTI.