Stock investors have many things to worry about, but a strong U.S. dollar is not one of them.
That’s worth keeping in mind, since there is much hand-wringing on Wall Street about the impact on stocks from the dollar’s recent strength. But there is no historical support for such anxiety.
The next time you hear someone complain about the strong dollar, remind them of what happened in 2014. The U.S. Dollar Index
rallied more than 26% during that calendar year, while the SP 500
gained a dividend-adjusted 13.7% — and since then has produced an annualized gain of close to 10%. If a strengthening dollar can produce that type of result, then bring it on.
To be sure, this experience is just one data point. But it is such a glaring counter-example to the current narrative that you’d think that someone would have noticed it on a longer-term chart of the dollar index.
Another equally glaring counter-example is the 1987 U.S. stock market crash. One of the primary reasons analysts gave for that crash was the plunging U.S. dollar. In light of that, you’d think we’d be celebrating a strong dollar.
In any case, a more comprehensive analysis of the data failed to find a statistically significant relationship between changes in the dollar index and the SP 500’s subsequent return. That at least is the conclusion I reached upon feeding into my PC’s statistical software the historical values of the dollar index back to the early 1970s (which is when fixed exchange rates gave way to floating ones) along with the SP 500.
The accompanying chart illustrates what I found. It reflects the SP 500’s average three-month return as a function of the dollar index’s return over the trailing three months. Notice the absence of any consistent pattern.
There also is a strong theoretical basis for these findings. Most of the large corporations that dominate the SP 500 have both extensive operations overseas (expenses) as well as receive a big portion of their sales (revenue) from outside the U.S. The strong dollar means that the former of those two helps the dollar-denominated bottom line, while that bottom line is simultaneously hurt by the latter.
Most of the rationales I’ve read for why a strong dollar is worrisome focus just on the revenue side of the equation. But why overlook the expense side?
Furthermore, to the extent a company has lopsided foreign exchange exposure — with more- or less revenue coming from overseas than expenses — then it almost certainly will hedge that currency exposure. To the extent those hedges are successful, of course, then the dollar’s fate on the foreign exchange markets will have little near-term effect on the bottom line.
All in all: If you want to worry about something, focus on something else besides the U.S. dollar.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email email@example.com .
Read: What you need to know to sell stocks before it’s too late
Also: It’s time to sell into rallies, bear market or not
Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.
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