Although the US stock market is still on the path of continuously reaching new highs, Morgan Stanley has recently issued a new warning that the US stock market may soon face a correction.
On Monday Eastern Time, Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, warned US stock bulls that structural forces to suppress the US dollar may be spreading to the US stock market.
Shalit warned that the end of Japan's Yield Curve Control (YCC) and the rise in Bitcoin and commodity prices indicate that the strength of the US dollar may have reached its peak. Investors should "consider preparing for a shift in the US dollar exchange rate mechanism."
Is the strong momentum of the US dollar weakening?
Despite the US benchmark stock index continuing to hit new highs recently, Shalit and several other Wall Street insiders have issued warnings about the recent bull market in the stock market.
In his report, Shalit emphasized the correlation between the strength of the US dollar and the rise of US stocks. She wrote in the report:
"Although this correlation is not causal, given that the bull market cycle of the US dollar may be maturing, the correlation between the strength of the US dollar and the US stock market's earnings ratio is worth paying attention to."
After a cumulative decline of nearly 3% in the US dollar in 2023, the dollar briefly strengthened at the beginning of this year as traders continued to delay their expectations for the Fed's interest rate cut. However, in recent times, despite the slowdown in US inflation and further postponement of market bets on the pace of Fed rate cuts, the rise of the US dollar has come to a halt. Since early March this year, the Bloomberg US dollar index has fallen by 0.5%, while Bitcoin and gold prices have hit recent historical highs.
Shalit stated that the strength of the US dollar had previously been the core of the US "loose monetary system" - as the US dollar rose, import related inflation was suppressed, and energy prices were also lowered, which boosted the recent performance of US stocks. However, as the strong momentum of the US dollar weakens, US stocks may also lose their upward momentum.
The US dollar's decline may drag down US stocks
As the US dollar seems to be weakening, Shalit has recently encouraged investors to shift their focus beyond the US to hedge against potential pullbacks in the US stock market.
Shalit said that as major G10 member countries cut interest rates, the Bank of Japan may tighten its policies, which will boost the yen and put pressure on the US dollar, and attract funds to flow out of the US stock market. She also emphasized that the deterioration of Sino US relations, especially during the US presidential election, may also accelerate de dollarization - a trend that may have been reflected in the rise in gold prices.
Then, the broad downward trend of the US dollar will be transmitted to the US stock market through the P/E ratio, and the two will generally show a positive correlation in the long run, which means that a weaker US dollar will lower the P/E ratio. The increase in P/E ratio is the main driving force behind the recent rise in the US stock market.
Shalit stated:
&Amp; Quota; If global policies begin to rebalance towards the portfolio before the global financial crisis, or if market optimism collapses and the US dollar weakens, investors may benefit from asset diversification and geographical diversification& Amp; Quota;