March 16th Weekly Market Update
The massive U.S. dollar rally has wide-ranging impacts. It hurts international stock returns generated in foreign currencies. It influences global trade and the flow of investment dollars. A strong dollar hurts corporate earnings by reducing revenue earned by U.S.-based multinationals overseas in foreign currencies. It even puts downward pressure on inflation and commodity prices (including oil) and can influence monetary policy, corporate profit margins, and consumer spending.
These are important considerations, but the key question investors are asking is whether the strong dollar will derail the bull market. We don’t think so, based on how stocks have done historically during strong dollar periods. But the dollar does have important implications for asset classes and sectors, as we discuss below.
IS THE STRONG DOLLAR BAD FOR STOCKS?
We can certainly understand why market participants and the media are so focused on the dollar. Its ascent has been steep and its implications are wide ranging. In our January 26, 2015, Weekly Market Commentary, “No Deflating the U.S. Dollar,” we highlighted some of the reasons for recent dollar strength, including relative economic performance, relative interest rates, and monetary policy differences, among others. These factors all contribute to the outlook for the economy and corporate profits and help determine stock market direction. The dollar itself, however, is not a key driver of market performance – it is a symptom.
For the full article: DOLLAR STRENGTH IS A SYMPTOM, NOT A CAUSE