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Stock Market Dips as Dollar Strengthens

Market Digest – Week Ending 3/13

Stocks experienced modest losses for a third straight week. Selling pressure appeared to be tied to continued gains in the dollar and declines in oil. It now takes less than $1.05 to buy one Euro, down from $1.21 in the beginning of the year. A stronger dollar directly reduces profits for most US companies doing business overseas. Lower oil prices aren’t necessarily a negative, but volatility creates uncertainty which is driving some investors to go to the sidelines. Bonds rose as a safe haven and because the strong dollar may give the Fed a reason not to raise rates soon.

Weekly Returns:

S&P 500: 2,053 (-0.9%)
FTSE All-World ex-US: (-1.4%)
US 10 Year Treasury Yield: 2.12% (-0.12%)
Gold: $1,156 (-0.9%)
USD/EUR: $1.049 (-3.3%)

Major Events:

  • Monday – Apple revealed its watch and announced a streaming deal with HBO and Apple TV.
  • Tuesday – Iraqi forces made progress retaking parts of Tikrit from ISIS in a broad offensive.
  • Wednesday – The Euro hit a 12 year low by reaching $1.05.
  • Thursday – Most major US banks passed Fed “stress tests”, but four had to make adjustments and Bank of America was asked to come back with revisions.
  • Thursday – Two police officers were shot in Ferguson, Missouri as authorities try to balance the right to protest with adequate security.
  • Thursday – Intel lowered its sales forecast, signaling weakness in the PC market. Shares fell.
  • Friday – The IEA said a recent stabilization in energy prices may not last due to increasing supplies of oil. Energy commodity prices fell as a result of the comments.
  • Friday – The FCC put its review of Comcast’s deal for Time Warner and AT&Ts planned acquisition of AT&T pending a court decision related to disclosure of programming contracts.

Our take:

The United States dollar is on fire. The good news is it’s become a lot cheaper to vacation in Europe. The bad news is US Stocks are under pressure because a stronger dollar negatively impacts profits of most companies with overseas sales.

On the other hand, recent gains in the dollar are bound to make the Fed think twice about how much and how fast it raises interest rates. A strong dollar suppresses inflation and threatens the economy in some aspects.

The takeaway? It is impossible to know the short or mid-term impacts of currency trends. Trying to time them is likely to be futile. Currency-hedged international index funds are having their day in the sun and are accumulating billions of dollars. It is important to remember most investors are horrible market timers. If they are loading up on currency hedged funds, it is probably best not to join the herd.

We believe International Stocks should be between 20% and 40% of your total Stock allocation. Over time US and International Stocks should have very similar returns. They are highly correlated, but not perfectly correlated. Currency swings make International more volatile in the short term. So, by the basic principles of Modern Portfolio Theory, it makes sense to own both, but more US. We don’t like currency hedging in this area because it has a cost. Currency should be zero-sum over time, so it becomes an expensive proposition for no expected long term benefit – unless you’re right more than you’re wrong.

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