Opportunities on the Horizon: Investing Through a Slowing Economy

thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 28 The king of currencies? The US dollar is arguably the most successful fiat currency in history. Its widespread use as a store of value in finance and trade since World War II has made it the “king of currencies” in modern times. US dollar assets make up nearly 60% of the foreign reserves of the world’s central banks, while 88% of the world’s trade is invoiced in dollars. In our Mid-Year Wealth Outlook a decade ago, we forecasted that “major financial trends of the past decade are reversing. Important trends including the falling US dollar … and global investor outflows from dollar-denominated investments are at an end.” Sure enough, in the ten years since, the US dollar soared, and investors returned to the US with a vengeance. Nowwe see another reversal at hand. We believe the dollar is likely entering a secular bear market, its third in the past 50 years ( FIGURE 1 ) . Confidence, as expressed in dollar holdings worldwide, is peaking and so is the relative valuation of US equities. The Federal Reserve did the US no favors when it supported a huge fiscal expansion in 2021. What followed was monetary inflation. The Fed then sent the US dollar rising to its second- highest historic level in 2022 by embarking on a rapid tightening campaign that outstripped the tightening efforts of the rest of the world’s central banks. FIGURE 1 : Strong US Dollar and US Equities 75 85 95 105 115 125 135 20 30 40 50 60 70% ‘72 ‘77 ‘82 ‘87 ‘92 ‘97 ‘02 ‘07 ‘12 ‘17 ‘22 Real Trade-Weighted Dollar (1973=100) US Equity Market Cap % of Global US Share of Global Equity Market Cap (Left) Trade Weighted US Dollar (Right) Source: Haver Analytics and Bloomberg as of April 22, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. FIGURE 2 : Diverging USD-Euro Policy Rates 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 10 11 12 13 14 15 16 17 18 19 20 21 22 23 EURUSD (inverted) Fed Funds (upper bound) less ECB deposit rate (%) USD-EUR policy rate differential Market pricing of future rate differential EURUSD Source: Haver Analytics as of May 4, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Past performance is no guarantee of future results. Real results may vary.