- Fear Trumped Greed In The Stock Market Last Week.
- The Dollar's rise is offsetting earnings gains from oil's fall.
- Alibaba earnings on Wednesday could dictate the direction of U.S. markets.
Fear Trumped Greed In The Stock Market
After Friday’s market action, there is little doubt that fear is trumping greed in U.S. markets right now, especially with billionaire Donald Trump leading the Republican field for President.
Over the last week, the Dow Jones Industrial average has lost 300 points, opening on Friday below 17,400 for the first time since February. The NASDAQ opened at 5,043, which is its lowest opening in almost a month, and declined about 100 points in just two days.
This could be much ado about nothing, or it could be the start of a new, bearish pattern for U.S. markets. With oil down 44% and the U.S. dollar up 18% over the last year, earnings are under pressure.
It’s taking the shine off a market that, for tech investors at least, has been stellar so far this year, with popular stocks like Facebook (NASDAQ:FB) up nearly 21%, Google (NASDAQ:GOOG) up 25%, and Amazon (NASDAQ:AMZN) up an amazing 68%.
AMZN stock by amigobulls.com
The Almighty Dollar Will Hurt Corporate Earnings
The biggest problem is the almighty dollar, which is approaching its highs of early this year, before that, not in over a decade. When the dollar rises in value, earnings measured in other currencies are worth less and exports cost overseas buyers more. For instance, the dollar was trading at 46 to each Indian rupee five years ago. It now trades at almost 64. Great if you’re going to visit friends in Mumbai, but if they’re bringing Indian profits from iPhone sales to your Apple (NASDAQ:AAPL) balance sheet, over one-third of them disappeared.
American exports are becoming uneconomic in many parts of the world, and imports are becoming cheaper, which fuels America’s trade deficit, despite the fall in the price of oil. Things are only going to get worse if, as expected, the Federal Reserve decides to hike interest rates next month.
Is the U.S. Economy Too Strong? Stock Markets Seem To Think So
The Fed may hike rates despite the strong dollar because the U.S. economy is very strong. Adding in last month’s 215,000 new jobs and the economy has finally recovered from the Great Recession, the greatest jobs calamity since the Depression of the 1930s. Salaries have not yet reached pre-recession levels, and over 10% of workers who want part-time work still can’t find it, so many Americans still think the economy is doing poorly, even though things are great compared with other economies.
What Will The Stock Market Do This Week?
The result of all this is that media stocks and technology stocks, which led the market higher all year, rolled over big-time last week. Walt Disney (NYSE:DIS) was a disaster, losing about 10% of its value after concerns were raised about future earnings from its ESPN cable channels. Other stocks also fell, and the big question for today is whether we’re due for a bounce back up.
My own crystal ball says yes, we are. Technology and services remain very, very strong, and with earnings from food companies like Sysco (NYSE:SYS), restaurants like Red Robin (NASDAQ:RRGB) and department stores like Nordstrom (NYSE:JWN) coming in, we may be due for some good news.
Just watch out for Alibaba (NYSE:BABA), due to report earnings on Wednesday before stocks open. If they fall well below the 41 cents/share earnings expected, it may be a signal that China is in even-bigger trouble than previously believed and we could be in for another selling wave.
No one’s crystal ball is perfect, after all.
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