The USD And The Macro Equities Correlation

There are a lot of ways to look at the correlation between the U.S. Dollar and U.S. Equities. That said, we’ve covered this theme before; see my recent piece here and Andrew Kassen’s here. But this is a part of a much longer conversation meant to be parced in pieces. So I’ll continue the conversation with a couple more historical U.S. Dollar charts and some thoughts. Please feel free to post comments below.

The Correlation
Considering that the market recycles the secular “bull” and “bear” every 16 to 18 years, I thought it would be good to look at a chart of the past 30 years to see if the often talked about equities-to-U.S.-dollar correlation holds true. And considering that 1982 was roughly the start of the last secular bull market, with 2000 roughly marking the top and the start of a new bear market, this time frame offers a lot of data points to consider.

From a macro secular point of view, the correlation has been decent over the past 30-plus years: when the U.S. Dollar Index peaked near 160 in 1985, the S&P 500 was less than 200. And when the S&P 500 hit new highs over 1500 in 2007, the U.S. Dollar Index was cut in half at 80. However, looking at the various cycles and fractals of time, it is much less reliable. From 1981-1985 and 1995-2000, the dollar rallied along side equities. But even so, the ratio of equities pricing (S&P 500) to the dollar index was expanding (see the second chart below). That said, the attacks of 9/11, coupled with the housing and sovereign debt crises (all during a surge in globalization) brought about the current era of low rates and easy Fed Policy. And this has exploited the correlation further. So, again, on a macro basis, the correlation holds water over the past 30 years.

Blurred Lines
But -- and this is big but -- there are many countries involved in the ongoing sovereign-debt crisis, which could spur currency wars and additional volatility -- both of which may blur the correlation going forward. Interesting times, my friends. As always, thank you for reading.