John Hussman: Dollar Weakness Isn't Benign

Excerpt from fund manager John Hussman’s weekly essay on the US market:

The market's sharp decline last week probably had a number of causes. First was the fact that the Fed signaled that it wasn't necessarily finished with its tightening cycle. Now, as I noted fairly early this year, there's no statistical evidence at all that stock prices or corporate earnings perform well in the 18 months or so following the end of a rate-tightening cycle. But despite this, the end of tightening has been widely hoped on as a catalyst for further stock market gains. And even though market participants were already well aware that the Fed only saw the possibility of a “pause,” my impression is that once the latest statement was out, a lot of investors suddenly realized that they couldn't talk about the tightening cycle being over, nor could they talk about it being over at the next meeting. In fact, it might be months before the end – and if there's one thing that markets don't like, it's uncertainty.

So a good part of last week's decline was probably the injection of fresh uncertainty into the monetary picture. At the same time, the dollar fell apart. This is important, because I've noted for a long time that sudden dollar weakness would probably be among the first signs of oncoming economic weakness, especially if accompanied (at the same time or shortly thereafter) by widening credit spreads. That's what to watch for now – things like the difference between commercial paper yields and Treasury bills, the difference between Moody's BAA and AAA yields, the difference between the Dow Jones Corporate Bond Index yield and 10-year Treasury yields, and so forth. This sudden dollar weakness is probably not benign.