Why are markets reaching new highs, while the USD stays weak?

What is driving markets to new highs?

When the markets suddenly fell following the Tariff Wars announced by Trump in April, we tried to bring back some perspective about the worries and concerns of investors. We talked about how global stock markets, especially the US stock market, have ridden out volatility and fluctuations in price movements to continue to grow and rise over long periods of financial history. 

When markets are down, it presents a great opportunity to get a bit philosophical about investing and also think about why you are investing. So we mentioned the longer and broader perspectives that are not normally discussed in these circumstances but are highly relevant. 

We mentioned that the quantum of money and the total global liquidity have continued to expand. All systems involving nature and humankind–the laws of nature–have always had an inflationary and expansionary nature designed into them. 

So when you look at the continued growth in sales and earnings that are the backbone of the growth in the value of these companies, it is driven by the ever increasing number of people who use these goods and services, and as such, the inflationary nature of price, money and economic systems. It is no wonder that markets continue to go up over the long term. 

What normally happens when markets reach new highs?

Talking of laws of nature, many investors think that when markets reach new highs, the laws of physics apply to financial markets too. The common adage is  “What goes up, must come down”.  As markets rebound quickly from lows or power ahead to new historical highs, the vast majority of people, when asked what happens after the market reaches a new historical all-time high, think that the market will fall thereafter. 

At first, it seems so logical.

The human brain is conditioned to mean reversion, especially when we say words like “all-time high”, or “a peak” and think that the next move is down, as we apply the laws of gravity to financial markets. The historical and empirical evidence and a more scientific approach to this subject backed by data, tell us that people are applying the wrong laws of nature.  This, in turn, causes us to make the wrong behavioural decisions and hold false beliefs based on unproven evidence or wrong assumptions and thus hinders us from achieving good or better investing outcomes. 

Using S&P 500 index as an example, which also has one of the longest historical track records, the historical data gives us a very strong and consistent message. Normally, the markets, after reaching a new high, will go on to mark another all-time high due to the long-term direction of markets. 

Markets fall, but they don't stay down

Another common mistake investors make is to confuse the fall in markets during the year versus the full year returns.

However, once again, historical evidence suggests that if there is a correction in markets, time and again, the right strategy is to buy more, not sell.

If we look at just the past 15 years and even 2025 year-to-date, the markets fell during the year between just -2.6% in 2017 to a whopping -33.8% in 2020 during COVID-19.  However, the market not only recovered to post a positive return of 16.4% for the full year in 2020 but averaged an annual return of more than 15% during that 15-year period. Even in 2025, we have already seen a fall in markets from the peak to trough of -18.8%, but we stand today at a new historic high and a positive return of 7.5% for the year. 

The market only showed a small negative return in 2018 and a bigger fall in 2022, but 14 out of 16 years (including 2025) is a positive year despite markets often falling by double digits during the year. Yes, markets always fall at some point, but it doesn’t stay down. 

Why USD weakness is nothing new

Now that we have ascertained that new record highs and falling markets in the short term are not something to be worried about, but in fact the norm, how do we go about investing now? Should we be worried about the tariff wars, the geopolitical extreme events like wars? What about the economic concerns of the rising risk of stagflation in the US even as China still struggles to get its engine of growth going again? 

If we have learned anything from financial market history, it is that geopolitics or local politics rarely have a lasting impact on markets. The markets are driven by the underlying fundamentals of the companies listed on the markets in the long-run. 

The asset class that the tariff wars and geopolitics do have a meaningful and lasting impact on is currencies. The protectionist policies of the United States have raised long-term concerns over the hegemony of the US in the global context. Furthermore, the burden of rising fiscal deficits and the continued rise in US government debt has led to bond vigilantes causing long term treasury yields to rise. Thus the US dollar has been hit hard as investors scramble to diversify their risk. 

However, as has often been the case, the demise of the US stock market, the US economic resilience and the position of the US dollar is premature. The dominance of the US market in global stock markets as well as other financial markets and trade means the US Dollar is unlikely to be overtaken as the pre-eminent currency globally in the near term. 

However, we must be aware of the risks over the long term of structural problems that must be addressed and weigh that against the possibility of a rebound in the short term. 

For Hong Kong-based investors, while the local currency is pegged to the greenback, one should always consider market returns in a currency that matches their expenses and liabilities to minimised currency risk.

This peg provides a degree of stability, but potential shifts in US monetary policy could indirectly affect HKD yields and capital flows.

Read more:

• ‍Investing when the market has run up is hard, but here's what helps
• The laws of nature: Why markets go up in the long term
• Is USD dominance over? How to manage currency exposure

<divider><divider>

Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. 

This article is not intended to be relied upon as a forecast or research or investment advice, and should not form the basis of any investment or other decisions. The information contained herein is not intended, and should not be construed, as any legal, tax, regulatory, accounting or financial advice. If you would like investment, accounting, tax or legal advice, you should consult with your own professional advisors regarding your individual circumstances and needs.

The information in this article may not be suitable for all investors. You are responsible for any action that you take or decision that you make in reliance on any content in this article, and you agree that Endowus HK Limited (“Endowus”) is not liable under any circumstances.

No invitation or solicitation

Neither the information, nor any opinion, contained in this article constitutes a recommendation, offer or solicitation  by Endowus or its affiliates to you to buy or sell any securities, collective investment schemes or other financial instruments or services, nor shall any such security, collective investment scheme, or other financial instruments or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. 

This is not intended to be an invitation or offer made to the public to subscribe for any financial product or to enter into any transaction.

Accuracy of Information

Whilst Endowus has made reasonable efforts to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or errors in any such information. Endowus does not warrant or represent that the information in this article is correct, accurate or reliable. 

Opinions

Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.  

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this article are subject to market influences and contingent upon matters outside the control of Endowus and therefore may not be realised in the future. 

In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

This article has not been reviewed by the Securities and Futures Commission of Hong Kong.