Markets volatile while the US dollar rises

If you’re still in the stock market, I hope you handle stress well.

Over the past three weeks, the NASDAQ has hit TWO multi-year highs and then precipitously dropped more than 2%.  The S&P500 had similar performance but with slightly less declines of about 1.5%.

The very large capitalized stocks are holding up well [for now] but smaller growth oriented companies have had a tough year, many of them 20% off their highs.

In my opinion, stocks are fair to overvalued.  While GDP barely grows at 2%, large cap equities manage to squeeze 6-10% earnings growth [thanks in part to generous share buyback programs].  Many sectors maintain high valuations.  About 30% of stocks in the Dow Jones Industrial Average have lofty PE ratios exceeding 20 times earnings.  While a 20 PE might be appropriate for a nimble growth company, given current economic conditions it seems high for the likes of:  3M, Home Depot, J&J, P&G, and Coca Cola.

Twenty years of earnings seems like a high price to pay for a 2% dividend.

I have no way of knowing if the market is at a top but I do find the rising value of the US dollar a red flag.  For weeks the dollar has strengthened as the Fed prepares to end QE3 while at the same time Asia & European central banks are easing their money to combat slowing growth.  That could be bad for high dividend stocks [who generate more than 50% of their earnings from foreign markets].  The high dollar could hurt exports and they could suffer unfavorable currency exchange.

Time will tell.

 

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