FINANCIAL MARKET UPDATE 2.18.2020

STORY OF THE WEEK

THE DOLLAR IS RISING. IS THAT GOOD OR BAD?

The U.S. dollar has been appreciating relative to other currencies, and it is nearing the highest levels since 2017. Currency movements have both direct and indirect impacts on investors. Whether dollar strength helps or hurts is a matter of perspective.

Source: Koyfin.com

For a U.S.-based investor that has diversified their portfolio abroad, dollar strength can be a headwind. An international stock fund, for example, will take investor dollars and convert them into non-U.S. currencies to then invest in foreign stocks. The performance for this type of fund is therefore based on:

  1. The return of the underlying stock(s)
  2. The return of the currency

To say a foreign currency has weakened relative to the dollar, is to say it now purchases fewer dollars. When the international stock fund converts the foreign currencies back, fewer dollars translates as a negative return. The reverse is true when the dollar weakens. When the stronger foreign currency converts back to more dollars, the return impact is positive.   

A less direct consequence can be seen within the performance of individual companies. Domestic companies that export goods and services abroad can be hurt by a stronger dollar. As the dollar appreciates, U.S. exports become more expensive in the global market, which hurts demand and/or makes alternatives from other countries more attractive. This negatively impacts the exporter’s bottom line, and potentially their stock price as well. The reverse is true for importers, who benefit as the stronger dollar lowers their input costs.

Understanding the direct and indirect impact of dollar strength on a portfolio is not always straight forward. What happens if a U.S.-based investor invests in the stock market of another country that is a heavy exporter? On one hand, there is a negative return on the currency, as it converts back into fewer dollars. On the other hand, the exporters may benefit as their products have become cheaper in the global market place. The two factors offset to a degree, but it’s not easy to estimate how much.

Fortunately, it is not imperative to have a complete accounting of how currency movements have impacted past returns, or how things will play out in the future. Large movements in the dollar are very difficult to predict, but they tend to ‘mean revert’ (return to normal) in the long-term. This means the positive and negative impacts on investor portfolios generally wash out over time. For a diversified investor, dollar strength (or weakness) need not be feared.

WEEK IN REVIEW

  • As of last Friday, 77% of the companies in the S&P 500 have reported Q4 earnings. Blending the earnings growth rate of companies that have already reported with the estimates of companies that have yet to report, Q4 earnings are projected to be +0.9%, vs the initial expectation of -1.7%. With U.S. stocks valuations stretched, companies will need to grow the earnings to justify further/sustainable market gains.
  • The Bureau of Labor Statistics (BLS) published updated inflation data last week. The Consumer Price Index (CPI) increased at a 2.5% YoY clip, the fastest rate since October of 2018. Price gains were led by rising rents. The “core” CPI figure, which strips out the volatile food and energy components increased 2.3%, which has remained unchanged for the last four months.
  • Other data published last week showed that retail sales grew modestly in January (in line with expectations), while industrial production, which measures utilities, mining and manufacturing activity, declined for the fourth time in five months. The decline is being attributed to warmer weather reducing utility demand, and Boeing’s 737 Max issues lowering manufacturing.

HOT READS

Markets

  • ‘Dean of Valuation’ says Tesla would need VW-like sales and Apple-like margins to justify stock (CNBC)
  • U.S. Consumer Spending Picks Up, While Manufacturing Declines (WSJ)
  • Japan’s Economy Shrinks 6.3% as Sales-Tax Increase Cools Consumption (WSJ)

Investing

  • LAnd of the Undead (Prof Galloway) Netflix may not survive the streaming wars
  • Some Lessons From 92 Years of Market Return Data (AWOCS)
  • Crash Course (Humble Dollar) 30 years after their market collapse, Japanese stocks remain 40% off their 1989 peak

Other

  • How George Steinbrenner and the Harlem Globetrotters Changed the NBA Forever (WSJ)
  • The Perils of “Survivorship Bias” (Scientific American)
  • They Documented the Coronavirus Crisis in Wuhan. Then They Vanished (NYT)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY