US Dollar Index
After speeches from three Fed officials on September 12, 2016, the US Dollar Index (UUP) fell 0.16% on that day. The US Dollar index is more sensitive to the Fed’s decisions. If the Fed hikes the rate, it indicates that the economy is on a stronger path. This strengthens the movement of the US Dollar Index.
However, on Monday, three Fed officials indicated that the economy still isn’t showing a stronger move. There shouldn’t be any rush to hike the interest rate in the September meeting. This weakened the movement of the US Dollar Index.
The stronger dollar always hampers the earnings of the S&P 500 index. We’ll analyze the performance of the US Dollar Index with respect to the earnings of the S&P 500 index.
Earnings of the S&P 500 index
In the past 20 years, the rise in the US Dollar Index led to a subsequent fall in the earnings of the S&P 500 index (SPY). On a quarterly data basis, the US Dollar Index touched its all-time high of 119.47 in 2Q01. The S&P 500 index’s earnings fell by 22.50% from the high in September 2000 to the low in June 2002.
After the Fed ended its QE (quantitative easing) program in October 2014, the US Dollar Index strengthened with the expectation of a gradual rate hike. The US Dollar Index rose by 11% from October 2014 to September 9, 2016. Currently, the US Dollar Index is 5% below its high of 100.17 on November 30, 2015. In the last seven quarters, the earnings have contracted by 5.6%, while the S&P 500 index (IWM) (IWF) rose nearly 3.3% since December 31, 2014, as of September 9, 2016.
The rise in the S&P 500 index (QQQ) (VOO) could be attributed to a better forward earnings estimation. However, the US Dollar Index could rise more if the Fed continues the gradual rate hike in the next few quarters. As a result, the rise in the US Dollar Index (UUP) could lead to a subsequent fall in earnings. This could be translated into a price correction in the S&P 500 index (VFINX).
To learn more, read David Rubenstein: Private Equity and US Business Spending.