U.S. vs. Global Markets: Pain is Where You Feel It

For months now, the entire media and the financial blogsphere has been talking about how dismal the U.S. financial markets have been. There is a tendency to believe that we are at the center of the world and that our problems are amplified compared to everyone else’s. In reality, although it may be true that we are situated at the hub of the world economy; but relatively speaking, our problems are not so bad.

The decline of the U.S. market (DJIA) by 7.9% YTD is hardly a dent compared to the losses other countries have been experiencing this year.

Since this global financial crisis originated in the kitchens of Main Street and the laboratories of Wall Street from within the United States, it may seem odd that the U.S. markets are performing so much better than other nations. Although it may be counterintuitive, the declining value of the U.S. dollar is actually working to buoy the U.S. stock market. The decreasing U.S. dollar value causes U.S. stocks to be relatively cheaper, and therefore they are attractive to foreign investors.

Additionally, multinationals and U.S. export companies can benefit from creating products at $U.S. cost, and selling at relatively higher prices in foreign markets (>45% of revenue from S&P 500 companies comes from outside of the U.S.). As expected, non-U.S. countries have experienced the opposite effect of the declining U.S. dollar. Foreign companies have seen eroded profit margins as they have been forced to decrease prices (relative to their currency) to remain competitive in our retail market.

In addition to benefiting from increased opportunities sparked by declining dollar values, the U.S. stock market has been kept afloat by Bernanke and the Central Bank’s aggressive tactics. Since the beginning of 2008, The Fed Funds rate has declined by 2% and the discount rate has declined by 2.25%. Anybody who follows the stock market has noted how drastically the stock market moves in anticipation of and in response to rate changes.

As global as the world has become, international markets are impacted by U.S. interest rate changes. The response and benefit of rate cuts on the U.S. market is relatively much greater. We are also affected by rate changes, and currency fluctuations with our trading partners.

Stay tuned.

World Interest Rates Table

Major Central Banks Overview
Central Bank	Next Meeting	Last Change	Current Interest Rate
Bank of Canada	Apr 22 2008	Mar 04 2008	3.5%
Bank of England	Apr 10 2008	Feb 07 2008	5.25%
Bank of Japan	Apr 09 2008	Feb 21 2007	0.5%
European Central Bank	Apr 10 2008	Jun 06 2007	4%
Federal Reserve	Apr 30 2008	Mar 18 2008	2.25%
Swiss National Bank	Jun 19 2008	Sep 13 2007	2.75%
The Reserve Bank of Australia	Apr 01 2008	Mar 04 2008	7.25%

Comments

[xander]

note well the aussie interest rate and the effect it will have on fxa s earnings[ probably about 6.75 percent going forward]