Global currency declines may fuel bull market melt-up
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A wave of global interest rate cuts is pushing currencies lower. That could fuel the bull market higher, but not necessarily for the right reasons, as we learned in the late 1990s.
Why it matters: When multiple currencies weaken at the same time, they remain stable against each other but lose credibility with investors.
- That dynamic often drives capital into U.S. markets, pushing up valuations to unsustainable levels that can quickly topple over.
Catch up quick: Central banks from Europe to India and now the U.S. are cutting interest rates, leading to declines in their respective currencies.
- The synchronized devaluations resemble the Asian financial crisis and Russian ruble collapse of 1998, when multiple currencies sank, leaving investors looking for new ways to allocate capital.
- Cue the flight to U.S. tech stocks, a trade that made investors plenty of money, until it didn't. The melt-up seen then could mirror itself today, especially given the recent rally in AI stocks.
What they're saying: "If we're truly following the 1990s playbook, we may have much more upside ahead than most people realize," writes Joe Tigay, portfolio manager of the Rational Equity Armor Fund.
Between the lines: The other similarity to the late 1990s? Rate cuts.
- After the Federal Reserve's rate cuts in 1995, stocks rose steadily. But it was the 1998 currency crisis that sparked the Nasdaq rally into 2000.
- It's still unclear whether today's interest rate cuts will impact an economy that is slowing or growing. The answer to that could determine how much runway this bull market has left.
What to watch: Melt-ups come with turbulence. Volatility surged alongside stocks in the late 1990s. Today's tariff headlines and policy uncertainty could play a similar role, though the volatility gauge known as the VIX has thus far remained relatively subdued.
The bottom line: A global currency devaluation cycle could push the bull market further than most expect. The question is whether investors will know when it's the right time to get out.
