The greenback took a swoon this year, and it’s affecting your investments. But that’s good news for U.S. stocks.
Since the end of last year, the value of the greenback dropped 20 percent. On Dec. 28, 2016, the trade-weighted dollar index versus the major currencies of the world was 96.9, but it steadily fell to 87.1 recently, according to data from the Federal Reserve Bank of St. Louis. And that’s even with a small rally in the dollar last week.
There are a couple of reasons. Vincent Catalano, global macro strategist at Blue Marble Research in New York, says much of the issue can be linked back to trade.
Since taking office, President Donald Trump has said the country is not getting a fair shake from free trade deals that preceded him. The concern investors have now is that his administration may turn back the clock on international trade and usher in higher tariffs, reduced quotas or other trade barriers. Most economists believe that such anti-free trade measures result in lower economic growth.
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In turn, a slower U.S. economy would mean lower interest rates, which makes the currency less attractive to international investors. Hence, investors dumped greenbacks in favor of other currencies.
The other reason is that investors don’t believe that the Federal Reserve will raise the cost of borrowing money as fast as had previously been forecast. Again, when the expectation is that the interest rate will be lower than expected, investors tend to dump dollars.
Both issues helped lead to the decline in the dollar, although the dollar got a boost last week when Fed Chair Janet Yellen indicated that the Federal Reserve shouldn’t wait until the economy reached 2 percent inflation to accelerate interest rate increases.
What it means. “For the consumer, it means our import prices should go up, so it isn’t a particularly good outcome for them,” says Terry Gardner, senior managing director at CJ Lawrence in New York. You’ll pay more for some of the items you buy at the store.
“But for U.S. companies that sell in overseas markets, they should see a benefit,” he says.
And for the stocks in the Standard & Poor’s 500 index, foreign sales account for a significant portion of revenue. The data for 2016 shows that 43.2 percent of total sales for the companies came from outside the U.S., according to a July-dated analysis by S&P Dow Jones Indices. That level of non-U.S. sales is the lowest since 2003. But it is still a large portion that can have a significant impact on earnings.
The stocks in the index include major car companies such as General Motors Co. (NYSE: GM), and consumer products companies such as Procter & Gamble Co. ( PG) that have manufacturing operations in the U.S. and overseas.
Those foreign sales now look even bigger when they get converted back into U.S. dollars, boosting global revenue for the S&P 500. That’s good news for those companies.
Smaller domestic companies, or those that don’t sell much to non-U.S. markets, won’t necessarily see a revenue boost due to the dollar weakness.
Exports. “We are getting a lot of strong manufacturing data except for autos,” says Peter Morici, professor of business at the Robert H. Smith School of Business at the University of Maryland.
The Institute for Supply Management’s manufacturing PMI, which measures the health of the factory sector, jumped to 58.8 in August from 56.3 in July. A reading greater than 50 means that the industry is expanding. Of particular note was the employment component of the index, which jumped from 55.2 in July to 59.9 in August. That means U.S. factory managers are accelerating their hiring.
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The weaker dollar almost certainly plays into this strength. When the greenback falls in value, it makes U.S. products cheaper when measured in foreign currencies such as the euro, the Japanese yen, or the British pound.
It should also be clear that when the greenback is weaker, then shares priced in dollars are cheaper than they would have been had the currency not weakened. That’s one factor that makes the U.S. market somewhat more attractive to foreign investors.
How to invest? While the dollar continues to weaken both manufacturing firms and big multinationals should do well.
For big multinationals, investors may want to consider investing in the SPDR S&P 500 exchange-traded fund ( SPY), which tracks the S&P 500. Companies in the index receive more than four fifths of their revenue from outside the U.S. The ETF has annual expenses of 0.1 percent or $10 per $10,000 invested.
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For manufacturing, consider the Vanguard Industrial ETF ( VIS), which tracks a basket of industrial stocks. Like the SPDR S&P 500, it has annual expenses of 0.1 percent.
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How Weakness in the Dollar Affects Wall Street originally appeared on usnews.com
