The Dollar vs. The Stock Market

In the last few months, there has been a very strong correlation between the dollar and the stock market.  It seems that when the dollar is down, the stock market is up, and vice versa.  This means that the main driver of the stock market right now is monetary policy.  It also means there is somewhat of a correlation right now between gold and the stock market.  A weak dollar is benefiting both.

If you are invested in the stock market, then monetary policy is the most important thing to pay attention to.  Forget about company earnings or balance sheets.  Maybe for individual stocks it is something to pay attention to, but for the broad market, it is the words and actions of the Fed that is driving it.

Right now, it seems that everyone is expecting QE2.  This is the second round of "quantitative easing" or money creation.  The big looming questions right now are how much and for how long.  Another question is what form it will take.  Will the Fed just buy bonds the old fashioned way?  Or will the Fed try something different for a "shot in the arm" for the economy.  Either way, it will be horrible policy, but it will affect the dollar and the stock market.

It will be interesting to keep watching this correlation.  If the stock market and the dollar start moving down together, then watch out.  It is unlikely that we will see them move up together.  Let's see what Bernanke and the Fed actually do in the coming weeks.  We have heard a lot of talk up to this point, but we haven't seen much action.