“You can’t predict. You can prepare.” – Howard Marks
“Sell in May and go away” didn’t work this year as the equity markets we follow posted strong returns for the month. The strongest area of the market year-to-date is the MSCI EAFE and MSCI Emerging Markets indexes. For American-based investors, part of these returns is due to the weaker US Dollar, which continued its downward trend in May. The Aggregate Bond Index was down almost 1% on higher interest rates. Commodities were mildly higher.
All data as of 06/02/2025, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The stock market is often perceived as a distinct entity, influenced primarily by corporate earnings, investor sentiment, and trading activity. While these factors are indeed crucial and frequently discussed, we believe it’s essential to recognize that the US stock market is deeply intertwined with other financial markets.
Bond Market Influence: The bond market has a direct impact on equities. For instance, when interest rates rise, stock valuations typically decline, whereas lower rates can stimulate market rallies.
Currency Market Effects: The currency markets also play a significant role, particularly for multinational companies. Fluctuations in currency values can affect earnings, global competitiveness, and corporate strategies regarding investment for growth.
Commodities Market Impact: Changes in the commodities market, especially in oil, gold, and agricultural prices, can create ripple effects across various sectors, including energy, manufacturing, and consumer goods.
Real Estate Correlation: Additionally, the real estate market is correlated with the stock market. Variations in property values and mortgage rates can influence financial conditions and consumer spending patterns.
These interdependencies are important. Not only do they influence corporate earnings and market movements, but they also influence how we build more resilient, forward-looking portfolios. This month, we are looking at the currency market and what changes in its value versus other currencies may have on the US stock market.
A Strong or Weak Dollar
Historically, the US Dollar Index ($USD) has experienced multi-year cycles of strength and weakness, driven by a combination of macroeconomic factors, monetary policy, and global investor sentiment. In the past, investors viewed the dollar as a safe-haven asset. Periods of dollar strength have coincided with higher US interest rates, robust economic growth, and global uncertainty. Conversely, dollar weakness tends to emerge when inflation rises, trade deficits widen, or foreign central banks pursue tighter monetary policies relative to the Federal Reserve. Since the start of 2025, the US Dollar Index has declined 8.9%, we believe reflecting concerns over US trade policies, slowing economic growth, and rising inflationary pressures. Additionally, Moody’s recent downgrade of US credit quality has further dampened investor confidence and we believe is contributing to the dollar’s downward trajectory.
Looking ahead, the US Dollar Index may continue its decline. Of most importance, the Federal Reserve’s short-term interest rate policy will be a key factor. If the markets’ expected cut in short-term rates happens later this year, we would expect the dollar to weaken further as yield-seeking investors shift to higher-return assets abroad. Foreign investors, who have been large holders of US-based assets, are incentivized to move at least some of their US holdings when faced with strength in their home country’s currency. Additionally, geopolitical uncertainty and trade tensions could accelerate capital outflows from US assets, further pressuring the dollar. Finally, if the US economy slows more than expected or if foreign central banks tighten policy aggressively, the dollar’s downward trajectory could become more pronounced.
Chart #1: www.stockcharts.com Data 06/01/2005 – 06/03/2025 as of 06/04/2025. An index is not managed and not available for direct investment. MA 13 = 13-week moving average MA 40= 40-week
Portfolio Positioning for a Weaker Dollar
Market trends can last for years and even a decade or more. However, no trend lasts forever because the world changes. The world of 2000, 2010, and 2020 is not the world we live in today. Structural shifts in monetary policy, geopolitical events, technological disruptions, and changing consumer preferences eventually signal a reversal of what had been working for investors. The challenge is recognizing when sentiment is shifting and adapting before the trend fully turns. History has shown that those who cling too tightly to an expired trend risk significant loss, while those who anticipate change can position themselves for the next wave of opportunity.
If we are moving into a weaker US Dollar environment, as we believe is a real possibility, it is likely to be a trend for years, not months. This is important because funds will likely flow into areas of the US and global markets that have advantages from dollar weakness. This is different than the current investment atmosphere. Historically, there are areas of the market that have benefited from a weaker currency:
Multinational Companies: This works on a number of levels. Companies with overseas earnings convert to more US Dollars than when the dollar is strengthening. Companies with global supply chains experience higher demand for US-made goods as they become relatively cheaper for foreign buyers.
Real Assets: Gold and other precious metals have historically increased in value when the dollar weakens.
Oil & Natural Resources: Energy companies with global exposure have benefited from higher commodity prices in past periods of dollar weakness.
Emerging Markets and International Companies: Historically, international stocks have outperformed US stocks in a weak dollar environment. For the US-based investor, weakness in the dollar also provides a currency tailwind for foreign-based investments.
There are also areas to avoid:
Retail and Consumer Imports: A weaker dollar increases costs for goods that are imported, causing companies to increase the costs of their products to consumers, hold prices steady, and work on lower profit margins, or a combination of the two.
Airlines & Travel: Dollar weakness makes international travel more expensive, potentially reducing the demand for international flights.
Every Cycle Ends, Every Cycle is Different
Having a clear mind and not getting consumed by what has been working is important because every market trend eventually reaches a turning point. In our opinion, it is essential for investors to keep an open mind to change and look for early warning signs of a reversal. We focus on a few key indicators for signs of a change in economic conditions – shifts in monetary policy, where central banks adjust interest rates or liquidity measures. Investor sentiment has played a role in the past, but we do not believe is a reliable indicator in these polarizing times. Additionally, sector rotation can be a tell, as large capital allocators move away from previously dominant industries into emerging opportunities. Watching these signals help us be proactive with portfolio adjustments.
Understanding what has worked in the past is an important starting point. The weak dollar cycle of the mid-2000s was largely driven by Federal Reserve rate cuts, trade imbalances, and geopolitical uncertainty, leading to a prolonged decline in the dollar’s value. The current cycle, in our opinion, has different structural drivers. Today’s dollar weakness is influenced by high inflation, shifting global trade alliances, and concerns over US fiscal policy. At the same time, global central banks are tightening policy faster than the Fed, making dollar assets less attractive. Unlike the early 2000s, where the dollar decline was gradual, we believe the current environment suggests a potentially sharper correction, with investors reallocating capital away from US assets at an accelerated pace. This shift could have broader implications for commodities, emerging markets, and multinational corporations.
Final Thoughts
The markets move in long-term trends that are measured in years, not months. Changes in trend are not an everyday occurrence, but happen. For investors, it is crucial to recognize that the next phase of market dynamics will require a fresh perspective on investment strategy while leaning on what history tells us. We believe that the weakening US dollar is a persistent long-term trend, influencing global capital flows, sector performance, and asset allocation decisions. However, this cycle is distinct from past downturns, meaning investors must look beyond traditional playbooks to identify new opportunities and risks. Resiliant construction portfolio will come from the ability to quickly adapt and anticipate shifts in changing market conditions rather than merely reacting to them.
In times of transition, staying proactive rather than anchoring to outdated assumptions is essential. We are on the lookout for early warning signs of trend reversals, such as monetary policy shifts, sector rotation, and global trade dynamics, to ensure their strategies remain aligned with the realities of today’s financial environment. While no cycle lasts forever, disciplined, flexible, and forward-thinking investors will be positioned to turn market shifts into long-term investment success. Adaptability is the greatest asset to have in today’s market environment.
If you would like to discuss your current strategy, or how to build such a strategy, Contact Our Team Of Financial Advisors Today!
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner
Rob.Cahill@wfafinet
Jonathan D. Soden, Managing Partner
Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner
Susan.Shupp@wfafinet.com
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