Before the close of the trading day on March 10, U.S. stocks plunged to an all-time low, amidst an increasingly strong dollar, which is at a historical 12-year high against the euro. This comes amidst anticipation of interest rate hikes by the Federal Reserve.
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Cisco Systems Inc. and Intel Corp, some of the largest stocks on the Dow declined by about 1.9% in tow with other tech companies on the Standard & Poor 500 Index.
At the same time, American Express Co., Goldman Sachs Group Inch and United Technologies Corp also lost over 1.5%, which accounts for some of the biggest U.S. stock losses so far.
In New York, the S&P 500 fell to 2,051.19, a 1.4% decline in a record fall below average prices since February 9. Meanwhile the Dow Jones Industrial Average lost 257.49 points an equivalent of 1.4% down to 17,738.23 as stock prices for all the 30 companies declined. Following suit, the Nasdaq 100 Index fell by 1.6%
Michael James, managing director of Wedbush Securities Inc., said, “An increasingly strong dollar and the destruction of the euro are definitely raising some concerns. I don’t think there was any one specific event that caused this but the fact that that it is something that has been going on for several weeks now is worrying given the levels we are at now.”
There has been growing concern that the Federal Reserve may start to raise interest rates mid this year as the economy strengthens. This has seen a strengthening dollar and a weighing down on equities.
President of the Federal Bank of Dallas, Richard Fisher, in his most recent speech advised the central bank to progressively increase interest rates as employment grows to avoid a recession
Growing strength of the dollar
Last week, the S&P fell by 1.6%, the greatest fall since January, as the economy heads towards full employment according to central bank data.
Among other global central banks, the Federal Reserve leads the way in viewing high exchange rates as an indication of growing economic strength.
Major central banks including in Tokyo, Zurich, Wellington, Frankfurt and Sydney among others, are stimulating economic growth by buying government bonds and inevitably weakening their currencies.
This year alone, the dollar has rallied against 14 major currencies including the Brazilian real, euro, pound, and the yen.
According to Jim Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis, ‘The dollar is going up so fast one would wonder what the effects are on U.S. economic growth and on profitability down the road.”
This is the seventh bull year for the S&P 500 whose effects have pushed valuation to a 5-year high. The index has grown more than three times from its bear market all-time low in 2009, which was supported by low interest rates and bond-buying by the Federal Reserve.
The drop on March 10, 2015 was record breaking as all but one of 10 major groups in the S&P 500 declined. All 22 of the developed country indexes declined while the MSCI All-Country World Index fell by 1.5%, the greatest decline in two months.
According to analysts’ predictions, profits for companies on the S&P 500 will likely retreat by 5.1% in the present quarter.
In spite fears of rate hikes, the Fed Reserve policy is relatively accommodative. An accommodative policy combined with substantial liquidity from other major central banks will continue to make risker assets such as stocks attractive to investors.
Stocks to watch out for include Apple Inc. AAPL, which fell 2.03%, Barnes & Noble Inc. BKS, which had a dramatic fall of 10.06% and Urban Outfitters Inc. URBN, which gained 11.52%. Meanwhile European stocks SXXP fell into the red by 0.90% amidst Greece debt negotiations.
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