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Stocks are up only in terms of a declining dollar. In real terms, relative to gold, stocks have gone nowhere.
Technically, equities indeed are resilient and seemingly every other day shake off morning weakness to rebound by the close. Stocks reaching new 52-week highs are plentiful while stocks at the other end are scarce.
So what's the problem? Basically, negative factors don't matter until they do. Only retrospectively do their importance reveal themselves.
The bond market continues to voice its displeasure with the economy.
The U.S. dollar also expressed its concern. One week ago, the U.S. Dollar Index (DXY), a measure of the dollar against a trade-weighted basket of other currencies, broke down below a very important support level at 80 (see Chart 1). In fact, the dollar has been in a declining trend since June.
Granted, a weak dollar helps U.S.-based exporting companies, and indeed big, multinational stocks on the U.S. exchanges are beating smaller, domestically oriented stocks. But a falling currency only helps until it hurts.
So is the weak dollar, and not a positive outlook for the economy, boosting stock prices? Chris Carolan, proprietor of the Carolan.org analysis firm thinks so. He points out that the stock market priced in gold has barely lifted off its March 2009 lows.
By changing the pricing mechanism of the stock market from nominal dollars to the purchasing power of gold, we can see an undeniable multiyear bear market still in force.
To be sure, a falling dollar does boost the price of gold as well since it is priced in dollars. But gold has rallied for nearly a decade as the dollar gyrated wildly. Indeed, gold has made highs in terms of all major paper currencies. Gold is in a bull market no matter how we look at it.
For the near-term, stocks continue to show strength — but only in terms of depreciating dollars. In real terms of a golden constant, the stock market has barely maintained its value.