FOREIGN STOCKS ARE LEADING U.S. LOWER

FALLING FOREIGN CURRENCIES... Last week's message showed the U.S. Dollar Index rising to the highest level in twenty years.    That's due largely to the fact that the Fed has been hiking rates faster and higher than most foreign bankers.   What's good for the dollar, however, is bad for foreign currencies and stocks tied to them.   Chart 1 shows the Euro and British Pound falling to the lowest level in two decades.   Although not shown here, the Japanese yen has done the same which has forced its central bank to intervene to support the currency.  Emerging market currencies are falling as well.   Chart 2 shows the  WisdomTree Emerging Currency Strategy Fund under heavy selling pressure.

FALLING CURRENCIES BOOST INFLATION... Last week's message also explained why falling foreign currencies create problems for central bankers.  For one thing, falling foreign currencies can contribute to rising inflation in their economies.   That forces foreign central bankers to raise rates not only to fight inflation, but to support their falling currencies as well.   That can also have a negative effect on foreign stocks which are underperforming stocks in the U.S.

FOREIGN STOCKS UNDERPERFORM U.S... The weekly bars in Chart 3 show the MSCI EAFE iShares falling to the lowest level since 2020.  The blue solid line is a ratio of the EAFE divided by the S&P 500 which is also falling.   That relative strength ratio shows foreign developed markets falling faster than the U.S.   Chart 4 shows the MSCI Emerging Markets iShares falling faster than U.S. stocks as well.   That may carry bad news for U.S. stocks.

GLOBAL COMPARISON... The blue line in Chart 5 shows the MSCI World ex USA Index leading the S&P 500 lower.   That index includes foreign developed and emerging markets.   Their relative weakness in clearly weighing on the SPX.   Global stocks are highly correlated which means that they usually trend in the same direction which right now is down.   Falling foreign currencies are one of the reasons that foreign stocks are doing so poorly.   Their poor relative performance is just another sign that global economies are in recession or heading into one.   That's not good news for them or the U.S.