~ By Michael Lombardi, MBA
To see where the stock market is headed in 2015, we don't have to look much past these two important economic factors: the U.S. dollar and the economy, both domestically and outside the U.S.
After the Great Recession, to drum-up sales, U.S. companies focused their attention elsewhere in the global economy. With the U.S. dollar sliding lower in value back then, American companies focused on getting sales from other countries...sales that could be returned to the companies in the form of greater U.S. dollars. It was a sweet deal.
Now the situation is the complete opposite. With the U.S. dollar rising on the backdrop of promises by the Federal Reserve to increase interest rates, other major world currencies are falling in relation to the greenback, putting pressure on the revenues and profits of U.S. companies that get sales outside of America.
A large number of companies are posting softer earnings because of the strong U.S. dollar. Take Johnson & Johnson (NYSE/JNJ) for example. In the fourth quarter of 2014, the company reported a decline of 6.7% in their international sales attributable to a strong U.S. dollar. (Source: Johnson & Johnson, January 20, 2015.)
With almost half of the S&P 500 companies deriving sales from outside the U.S., a strong U.S. dollar is a big deal, as it impacts revenues and earnings negatively.
Despite all that has been done for the U.S. economy in terms of the government debt burden expanding at a record pace and the Fed's historic easy monetary policies, the American economy continues to perform at about 30% below its historical norm.
The chart below shows U.S. gross domestic product (GDP) going back to 2010. While you won't hear the mainstream say this, the fact is that the U.S. economy grew last year at a slower pace than it did in 2010. The average increase in U.S. GDP between 1930 and 2014 was 3.38%—we are way below that.
For the last five years, the U.S. economy has been performing well below its average annual GDP growth rate.
If this phenomenon continues, how can U.S. corporate earnings grow? After all, company profits are highly correlated to what happens in the economy.
Finally, the global economy is treading in shark-infested waters. All the economic indicators I follow point towards a global economic slowdown ahead.
Copper prices, as depicted in the chart below, are in a free fall. The copper market is pricing in a global economic slowdown just like it did in 2009.
If global economies are in for a severe slowdown, how can key U.S. stock indices advance? A global slowdown impacts corporate revenues and earnings—there is no way out of it.
We had a shaky start to the stock market in 2015 and more trouble will follow. There are too many economic risks that are being overlooked. And from my experience, stock markets take a long time to go up, but they come down very quickly.