Are ETF Investors Overlooking Warning Signs?

While the Federal Reserve (Fed)’s most recent statement acknowledged continuing concerns around international developments, it left the door open to a December rate hike. With a 2015 rate hike back on the table, the renewed prospect for monetary policy divergence between the Fed and other central banks is once again pushing the dollar higher. The greenback hit a 2-month high last week before surrendering some of its gains on Friday, according to data accessible via Bloomberg.

Should the trend continue, a stronger dollar would represent a headwind for U.S. inflation, precious metals and U.S. earnings growth, as I write in my latest weekly commentary.

To be clear, the recent rebound in the dollar is being driven as much by events in Frankfurt and Stockholm as by the Fed, amid a renewed divergence in global interest rates. In contrast to the Fed, which is poised to raise rates as early as December, most other central banks are racing in the opposite direction. The latest example: theSwedish Riksbank, which recently expanded its bond purchase program for the fourth time since February. While U.S. 2-year yields are paltry at less than 1 percent, they look tantalizing relative to Europe; 2-year yields are negative in France, Germany, the Netherlands and Switzerland, according to Bloomberg data.

Elsewhere, while the Bank of Japan (BoJ) declined to increase its quantitative easing (QE) program, the central bank did lower its forecasts for both inflation and growth. This raises the possibility of more QE from the BoJ in the near term. Any further expansion of QE would likely provide another positive jolt to the Japanese stock market, which is comfortably outperforming the U.S. year-to-date (source: Bloomberg).

Back in the U.S. going into 2016, a stronger dollar and the advent of a tightening cycle, even a gentle one, could impede both U.S. earnings growth and multiple expansion. For now, however, based on last week’s U.S. stock market performance, investors appear to be overlooking this fact.


Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.