Why You Still Lost Money When The Market Went Up

If you're a stock investor, you might be worried about what the sudden surge in the US dollar means for your portfolio. And if you're not, you probably should be because the entire market has been caught offside this week. Trump stunned investors once again. There's been a major shift at the Fed. Gold, silver, and Bitcoin have all been wiped out, and how you position for it today could decide your returns for years to come. Now, if you're new to the channel, I'm James Helliwell. I'm a former professional trader turned financial educator. And in this video, I'm going to show you why so much of what's happening comes down to the US dollar, what actually drives it, and why it matters even if you invest only in stocks or ETFs. So it's basically a one-way bet last year, and inflation fears sent it hurtling lower while gold and silver skyrocketed. And just last week, a reversal in the dollar left a lot of the markets scrambling to cover the positions. Now I'll explain why that happened a little bit later in the video, but for now, let's bring this back to stocks and what this means for your portfolio going forward. You're not just investing in American companies, you're also making a bet on the US dollar because your return comes from two things: the performance of US stocks and the pound-dollar exchange rate. And that's why in the years where the dollar's weakened, overseas investors can see much lower returns from the same investment even when US stocks have done well. But even for domestic investors, if you're buying stocks or ETFs in the same currency, you're still exposed to the dollar. Just without realizing. So I'm going to show you 3 ways that it could indirectly affect your portfolio. I want to begin with 2 of the most popular trades of the last 12 months in tech and mining stocks. In white, you have the US dollar index. So you can see that rallied a lot, it's gone sideways, and then it sold off a lot last year. In purple, you've got the ratio between the 2. So when this is rising, tech is beating the mining stocks. And when this declines, the opposite is true. It means that the miners are faring better. And you can see the correlation with the dollar very clearly. So what's happening is that as the dollar weakens, as it did last year, mining stocks tend to perform a lot better and tech tends to lag. And that's why the ratio of tech to miners has gone down. Now, to take this one step further, you might also look to focus on domestic companies versus those that generate the revenues overseas. The Home Depot gets about 90% of its revenue inside of the US. When this ratio is rising, Home Depot is doing better than Caterpillar, and that's tended to coincide with a stronger dollar. Caterpillar's machines are more expensive to their overseas customers because the dollar has strengthened. Now, with the dollar selling off, last year, that's where Home Depot really underperformed Caterpillar because again, a weaker currency has an outsized benefit on export-focused companies. So two US stocks, both of which are in the S&P 500 and your MSCI World ETF, but very different outcomes based on the direction of the US dollar. And that's what I want to emphasize here is this correlation. It's so clear. Basically, the the same trade. And remember that some of the funds that you can invest in might offer both hedged and unhedged versions, meaning that either way, whether you're investing in the US dollar version or the currency hedged version in your local currency, you're still taking a view on the US dollar. Now in this next section, I'm going to show you what drives it so you know whether it could be set to strengthen or weaken and how to position your portfolio accordingly. We're looking at a couple of things. So first and foremost, the level of interest rates. and that's going to be determined by the Fed, by central bank policy and the projected path for where they might be heading in the future. That relies on the market's expectations for two things: economic growth and inflation. So if you were to subtract inflation from the rate of interest that bonds pay, you would get the so-called real interest rate. Think of it like your current account. If your bank pays you 2%, but inflation is 3%, you're effectively losing 1%. As real interest rates fell, so too did the dollar. More recently, as real interest rates kind of bottomed out from 40-year lows, so too did the dollar index. The dollar's strongest when US real rates are either high or they're rising, and that's usually going to come when the economy is expected to grow but without creating too much inflation, which would detract on that. What's already known to the market is already in the price, and looking at historical charts we've just done of the real rate is like driving through the rearview mirror. So what I'm going to show you next is how the professionals figure out where the market's going to head, where real rates are heading, and how you can use this to your advantage as a dollar-savvy stock investor. This first indicator is known as the ISM Manufacturing PMI. It's an indicator of the business cycle. You can see how it oscillates in these waves, reflecting ultimately periods of expansion and contraction in the economy. So using this, we can begin to get a feel for whether or not the economy is likely to pick up speed in the coming year. And ultimately that's the growth component. But we can go a step further. And in this case, we're looking at two of the sub-indexes of the overall ISM report. The ISM has about 10 different things that it takes an average of and then gives you a headline number, whether it's above or below 50. Each of the subcomponents are measured in the same way, and the two that we're looking at here are the so-called new orders, which tend to move slightly ahead of the overall composite index. They're more sensitive to changes, minus existing inventories. Breaking below the 50 level, or in this case turning negative below zero, doesn't mean recession, but it always signals slowdown. Now to the second part, the inflation expectations. To make up real rates. This time looking at the Manufacturing Prices Index versus the Non-Manufacturing Prices Survey. When you take the average of these two, you can see how this has tended to once again move in a cycle and rollover at peaks in the inflation cycle. So you can see how correlated these are, but how the moves in inflation expectations tend to lead by a few months. So to sum up, the real interest rate which is what we're trying to figure out so that we can figure out the dollar and then figure out what it means for our stock portfolios, is basically growth minus inflation expectations. Expected growth, we can look at the new orders minus inventories subcomponents of the ISM survey. And for inflation, we can look at the combined prices subindexes for the manufacturing and the non-manufacturing PMI surveys. Now, this is just one of an entire toolkit of indicators you can use to try and figure out the business cycle and capitalize on these trends inside of your portfolio. But the ISM is arguably my favorite way of doing it. If you want to check out a few of the other ways, I've actually put together a playbook which I'll leave a link to in the description. You can get for free. But right now, let's get back to the video. By taking a look at the ISM, basically you're going to get an understanding of the two key variables when it comes to the macro drivers of real interest rates. Expected inflation and expected growth. But it's not always the case that policy is going to follow the macro, which is exactly what caught investors off guard last week and has caused this very sudden reversal in the US dollar. So what I'm going to show you next is the single most important thing that you need to watch in 2026. Trump. His policies have generally been seen as inflationary. In short, the market had voted to sell America. That was until last week. When he shocked everyone by announcing that surprise candidate to take over at the Fed. Now, people expected Trump to get his way in hiring somebody that was even more dovish than Jerome Powell, who would give him lower rates that he wanted. The incoming Kevin Walsh is his name, he's known for his stricter stance, so he's more of a so-called hawk. And that means that Trump's less likely to see the interest rate cuts that many people wanted or were expecting in the coming months. And this is exactly what sent gold and silver crashing as much as 30%. And it's frankly left many investors scratching their head, not knowing if the dollar will continue this rally, which would eliminate the currency risk at least of remaining invested in US stocks. So let me show you what the big funds are going to be looking at when it comes to deciding where to invest and what's driving the real rotation here. So let's return to our chart of the US real interest rate, because we know that this is what drives the attractiveness of the dollar and ultimately the attractiveness of US stocks. US assets. Pretend that we're a European or maybe a Japanese fund manager, or even if you're an individual investor there looking at global markets, you've got to think in terms of the opportunity cost to investing in the US. And we do this by comparing the difference between the US real interest rate and the local one, and that gives you the so-called differential. So you've got the US in yellow and Japan in green, and what you can see here is that Japan's real interest has been strengthening at the same time that the US real interest rate has been softening. Japan has been looking more attractive as a place to put your money compared to America. And that's what led to part of this mega rally that we saw last year. This is the S&P in white. This is Japan's Nikkei. You can see from that point, this drove the outperformance of Japanese stocks compared to the US over that period last year. So to summarize, relative real interest rates are the differential between Country A and Country B. In this case, we've looked at the US versus Japan. That differential will be reflected in the exchange rate. So in other words, it drives the currency and the currency, the exchange rate is what makes assets either more or less attractive to stock investors. Now the asterisk here is really important. Structurally more or less attractive. So what I mean by that is if you're the so-called real money, you're a big institution like a pension fund or a sovereign wealth fund, these guys need a structurally safe place to invest. Somewhere that they don't have to worry about negative real interest rates, or in other words, currency weakness, to a point where it really erodes returns. However, as is often the case in markets and only comes with experience, which I'm glad to be sharing with you here, short-term traders might see the same thing from the opposite perspective and see currency weakness as the opportunity to take a tactical— so short-term position— as the same companies and now for overseas investors, priced more cheaply. So whilst a weak currency might attract short-term traders looking for these tactical trades, the pension funds, the insurers, the sovereign wealth funds, all of whom are the biggest players in the market, trillions and trillions of dollars, they're gonna gravitate towards the markets with the highest real rate. And that's why Trump's latest move might well rein in inflation expectations, and it could see the US real rate and the dollar strengthen from here. So the remaining question is whether other countries will see the policies and the real rates converge or potentially diverge from the US real rate. And that's why you need to understand all of these things, even if you think you're diversified sitting there in the MSCI World ETF. But if you want to be truly diversified, then watch this video next where I show you how to build a portfolio of high-quality stocks doing business in multiple major currencies that you can hold for the long run and not have to worry about real rates and the US dollar.