Dow to 50,000? How the Falling Dollar Could Unlock Massive Stock Market Gains!

The movements of the stock market often seem unpredictable, yet certain indicators provide valuable insights.

by Faruk Imamovic
Dow to 50,000? How the Falling Dollar Could Unlock Massive Stock Market Gains!
© Getty Images/Drew Angerer

The movements of the stock market often seem unpredictable, yet certain indicators provide valuable insights. Among these, the US dollar's strength holds a pivotal role. JC Parets, the founder of All Star Charts, recently discussed on the "Compound and Friends" podcast how the US dollar's fluctuation could be a significant factor in the stock market's future trajectory.

Parets' assertion that a weaker dollar is essential for further stock market gains brings a unique perspective to the ongoing financial discourse.

The Dollar's Influence on Stock Prices

A key point in Parets' argument is the relationship between the US dollar's value and stock prices.

He emphasizes the necessity of a weaker dollar for those betting on rising stock prices. This view is supported by Savita Subramanian, a Bank of America strategist, who illustrates that a 10% drop in the dollar could lead to a 3% increase in S&P 500 earnings per share.

The reasoning behind this is straightforward: a falling dollar typically results in higher profits for S&P 500 companies, primarily through favorable currency translation effects. This year, economists at Bank of America anticipate a 3% depreciation of the dollar on a trade-weighted basis, which could act as a tailwind for corporate profits and, by extension, stock prices.

The Technical Analysis Perspective

Parets, a technical analyst, pays close attention to the chart patterns of the US dollar index. This index measures the dollar's strength against a basket of rival currencies. Following the index hitting 18-month lows in December, Parets suggests that a drop to the 2020 lows of about 90 could herald significant gains for the stock market.

He cites historical patterns where stocks surged following dips in the dollar's value, such as in 2016 and 2020. The recent bottoming of the S&P 500 in October 2022, a month after the dollar's peak, lends credence to this pattern.

Parets forecasts that if the US dollar index breaks down to the 2020 lows, it could potentially lead to the Dow Jones Industrial Average reaching 50,000 and the S&P 500 hitting 6,000. This represents a substantial upside from current levels, with the S&P 500 potentially seeing a 25% increase.

The Federal Reserve's Role in Currency and Market Dynamics

A critical aspect often overlooked in market analysis is the influence of central banks, particularly the Federal Reserve, on currency values and, consequently, stock market movements.

The Federal Reserve's monetary policy decisions, especially regarding interest rates, have a direct impact on the strength of the US dollar. When the Fed lowers interest rates, it usually results in a weaker dollar as lower rates decrease foreign investment in US assets, reducing demand for the currency.

In the context of 2024, the Federal Reserve's policy trajectory could be a key factor in determining the US dollar's strength and the stock market's direction. If the Fed opts for a more dovish stance, reducing interest rates in response to domestic and global economic conditions, this could lead to the dollar's depreciation as predicted by experts like JC Parets.

This softer dollar, in turn, would benefit multinational corporations in the S&P 500 by making their products more competitive in international markets and boosting their overseas earnings when converted back to dollars.

Thus, the Fed's policy decisions are not just a matter of national economic management but also a significant influencer of global market dynamics.

New York Stock Exchange© Getty Images/Spencer Platt

Global Political Events and Market Volatility

Another significant factor influencing the markets in 2024 is the global political landscape.

JPMorgan strategists highlight that 2024 is set to be the biggest global election year in history, with major economies going to the polls. They anticipate these elections to impact the economy and stock markets, potentially exacerbating trends such as polarization, populism, democratic deterioration, and geo-economic fragmentation.

The outcome of these elections, especially in populous countries, could have far-reaching effects. Populist regimes, for instance, are known to instigate major policy shifts that can lead to short-term inflation spikes, increased borrowing, and restricted trade, all of which could dampen global growth.

The US election, likely featuring a contest between President Joe Biden and former President Donald Trump, is expected to be particularly influential. Trump's potential victory and his anticipated policies, like imposing a universal 10% tariff, could significantly impact the dollar's value and global trade dynamics.

JPMorgan's analysis also points to a likely increase in the VIX, a measure of market volatility, especially during US election years. They suggest that investors should prepare for higher market volatility and increased risk premia in the face of election uncertainties and the resurgence of populism.

Moreover, a continued decline in global democracy, as reported by Freedom House and other watchdogs, could have consequential effects on the markets. JPMorgan notes that countries experiencing a downgrade in democracy metrics often see equity returns 5% lower over 10 years compared to those with upgrades.

This trend underlines the intricate connection between political stability, governance, and financial markets. The interplay between the US dollar's value, global political events, and market volatility in 2024 will be crucial.

Investors and market watchers alike must remain vigilant, keeping an eye on these key factors that could significantly reshape the financial landscape.