Monday Markets: Watch the US Dollar

Monay, 22 March 2021
Melbourne, Australia
By James Woodburn

[4 min read]

Dear Reader,

Before kicking off The Insider this week, just a reminder that Callum Newman’s ‘Flag Finder 2021’ event closes tonight. It’s free to attend, and Cal discloses one of his top stock picks to those that attend. But it finishes at midnight tonight. So if you haven’t had a chance to watch it yet, please do so right away.


For the past few months, the dominant theme in markets has been inflation inflation inflation.

That it’s coming is hardly questioned. It’s all about the speed and magnitude.

I’m talking about ‘consumer price inflation’, or at least the way it’s officially measured.

I’m not going to get into a discussion about it today. But I do want to look at the effect of it on different markets and work out whether it’s something you should continue to bet on.

The reason I bring it up is because whenever investors seem to come to a consensus conclusion about something, the market tends to turn.

Another way of putting it is that if ‘everyone’ believes in an outcome, that outcome is fully priced in (in the short term at least) and there is no more upside to it.

I don’t know if that is the case here. But I do know that ‘inflation’ is the dominant conversation around the world and has been for months.

As such, we should question its validity.

To do so, I want to start with the centre of the inflation trade; US 10-year bond yields. They’ve increased from a low of around 0.5% in August 2020 to just over 1.7%. That has put assets like gold and, to a lesser extent, growth stocks, under pressure.

Gold peaked as bond yields bottomed, as you can see in the chart below:

Source: Optuma

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The NASDAQ (a proxy for growth stocks) was more resilient. It suffered a (delayed) sharp correction in September, before hitting new highs. Recently, it’s come under pressure from rising bond yields again, correcting another 10% in February/March.

Source: Optuma

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But just looking at the NASDAQ doesn’t tell the real story. Rising bond yields have led to a rotation out of ‘growth’ stocks and into ‘value’ stocks. You can see that in the chart below. It shows the S&P 500 Growth Index relative to the S&P 500 Value Index:

Source: Optuma

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Growth peaked relative to value on 1 September. Since then it’s been all downhill, with the sell-off picking up pace over the past few months.

When you look at this relationship from a longer-term perspective, it’s even more concerning for ‘growth’ stocks…

Source: Optuma

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As you can see, growth has outperformed value since 2007. You could say that 2020 was a blow off top for this trend.

A similar thing happened back in 1999/2000. It ushered in a trend change that lasted eight years. Whether we’re at another inflection point, or just a correction in the trend (like early 1999) is anyone’s guess.

But if we are at the beginning of a trend of rising bond yields and higher consumer price inflation, then I would expect growth stocks to continue to struggle. Perhaps for the next decade.

Having said that, I don’t think this is an effective way to think about your investments. A lot can happen in the stock market in between a shift from disinflation to inflation.

What I mean by that is that inflation can take years to get going. And there can be lots of confusing signals along the way.

And right now, there are a couple of those signals going off. Which is why, from a shorter-term perspective, you should question the ‘inflation trade’.

For starters, have a look at a longer-term history of the US 10-year bond yield. Yes it has moved higher since August last year. But it is still way below the highs from late 2018, which was the end of the last reflationary period. At that point, yields hit just over 3.2%. We’re still well below that point!

Source: FRED

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So let’s not get too excited about inflation just yet. Despite all the bond market hype, the rise in yields is just telling you that the economy is recovering from its COVID hole. But the recovery is no where near strong enough to generate sustainable inflation. Not yet, anyway.

And now, we have a few signs that the inflation trade may be taking a breather. Firstly, there is the US oil price. It fell sharply last week after enjoying a very strong run.

The correction itself is not big deal. But this year’s run-up in price stalled right at the 2019 high. This suggests oil prices need to correct and consolidate before being able to move higher. That could take a few months.

Source: Optuma

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Also, there is the US dollar. While everyone has been shrieking about inflation and predicting the collapse of the dollar, it’s been moving steadily higher.

The chart below shows the US Dollar Index. It bottomed in early January. If it can move above the green line and its March high, it will suggest a change of trend is underway. A rising US dollar is not an indication of inflationary conditions.

Source: Optuma

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The dollar and bond yields don’t move in lockstep though. During the last reflation (2016–18) the dollar bottomed in early 2018, a good six months ahead of the peak in bond yields.

Perhaps the dollar is an early warning signal?

If so, it gave you a heads-up about the reflation trade in May 2020. If it breaks out above resistance in the coming weeks, it could be a warning that the reflationary surge is over, at least until the next bout of stimulus.  

Anyway, there’s some food for thought for the week ahead.

The other option is to just ignore all this noise and conflicting signals and buy quality companies at a reasonable price. If we do get a correction in the coming months, it will just provide better long-term buying opportunities.


Because over the long term, you know central banks will destroy their currencies in order to save the economy. A Pyrrhic victory if ever there was one…

That’s what my Life At Zero presentation is all about. If you haven’t seen it yet, you can check it out, here.   

Continue below for Murray Dawes’ ‘Week Ahead’ update. This week, Murray shows you his target for the US 10-year bond yield, and gives you an update on the stocks you’ve been following these last few months.


[WATCH] Bond Vigilantes Are Back

By Murray Dawes


The ASX 200 has spent the last four months trading within a 6% range.

Trading opportunities are few and far between and most stocks are drifting on profit taking.

The overriding theme is the path of US long-term interest rates and the affect a steepening yield curve will have on various sectors.

Financials are catching a strong bid and tech stocks are lagging for once. It looks like commodities are seeing some profit taking after an immense rally over the past six months. Their charts still look bullish long term, but I reckon the correction still has further to run.

After US Fed Chairman Powell’s comments last week after the FOMC meeting, it looks like the Fed is happy to allow the yield curve to steepen further. If the bond vigilantes have returned after years in the wilderness, it may not be long until Powell cries uncle and steps in to stop the rot.

In today’s ‘Week Ahead’ update I show you my target for the US 10-year bond yield.

I also give you an update on the stocks that we have been following over the past few months and point out the eight stocks that I would continue to hold.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader