Stocks Tumble and the U.S. Dollar Climbs

Stocks continue to fall and the U.S. dollar is surging higher. With interest rates on the rise, inflation still at decade highs, and the odds of a global recession now hitting 98.1%, it appears that volatility is going to remain.

The Dow Jones Industrial Average, which is an index made up of 30 large U.S. companies, is in a bear market, which is defined as a loss of 20% or more from the most recent peak. The S&P 500 is down 23% this year and is trading at its lowest levels since November 2020, while the TSX is trading at its lowest level since February 2021.

Why Is the Stock Market So Volatile?

New yearly lows have many investors asking whether or not the selling is over. While there has been some positive economic data out of the U.S., including housing starts and consumer confidence, there is every reason to believe stocks will fall further.

According to the latest data, the U.S is in a technical recession. The U.S. economy shrank by 0.6% in the second quarter. In the first quarter, U.S. gross domestic product (GDP) declined by 1.6%.

For the most part, it doesn’t feel like we’re in a recession. Businesses are hiring, unemployment is at its lowest levels in decades, and consumers remain confident. But headwinds remain with central banks continuing to hike their key lending rate at an unprecedented pace to rein in stubbornly high inflation.

The aggressive moves are expected to slow the economy and boost unemployment, which should bring inflationary pressures down. The fast increases in interest rates also mean we could experience a second recession in four years.

Why Is the U.S. Dollar So Strong?

Concerns about a global recession have investors seeking shelter in safe haven investments like the U.S. dollar. A rush to the U.S. dollar has put pressure on the Canadian dollar, which is now trading at $0.723 U.S., it’s lowest level in more than two years.

A strong U.S. dollar is actually not good for the stock market. U.S. multinational companies that generate sales outside of the U.S. report lower earnings when their sales are translated back into the stronger greenback. For the rest of the world, including Canada, a stronger U.S. dollar makes it more expensive to purchase anything. It could also worsen inflation.

In addition to products and services being more expensive, high inflation is also taking a bite out of consumer spending, which is a huge economic driver and drives corporate earnings. In the U.S., consumer spending accounts for approximately 70% of economic activity, in Canada consumer spending is responsible for around 60% of total GDP.

Because of high inflation nine-in-ten Canadians are spending less and expect more financial pain to negatively impact their budgeting. Of those surveyed, 66% said they’d cut back on discretionary spending while 50% said they’d delay major purchases and half (51%) said it was difficult to feed their household. The number rises to 68% for those with household incomes below $50,000.

It’s not a surprise, then, to learn that most economists believe we’re heading for a global recession.

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