Weaker Dollar and Your Investments in the Stock Market

Whenever the dollar goes up or down it affects different sectors of the stock market differently. Market Watch looks at what Wells Fargo says about a falling dollar and market sectors.

A falling U.S. dollar is getting a lot of attention from stock-market investors, and according to the chart below from Wells Fargo Investment Institute, the focus isn’t misplaced.

The chart sums up how the stock market and a variety of sectors have performed during past episodes of dollar weakness stretching back to 1988. As noted previously, the dollar’s long-term correlation with the S&P 500 SPX is somewhat negative, meaning that equities tend to rise as the dollar falls – though there are exceptions.

In general, a weaker dollar means more sales by multinationals offshore and thus higher profits. This is especially true with high tech companies that do not need to ship anything but simply download software via the internet. Companies that need to ship materials can still profit but have a higher overhead. On the other hand, companies that sell products and services within the USA tend not to do so well when the dollar falls. Much is this because discretionary spending goes down in recessions and whenever the dollar is weak. Utilities also suffer a bit during these times.

Where Is the Dollar Going Next?

Gold is going up as the US prints more money to deal with the pandemic. Is this a short term phenomenon or something long term? NBC writes about the dollar headed for a fall.

There are certainly plenty of economists out there who will tell you that the dollar is headed for a fall. If the rest of the world stops buying our IOUs, the Treasury Department would have to keep raising interest rates until it could find buyers. That could, in theory, throw the U.S. economy into tailspin.

But for all its vulnerability, the U.S. dollar is still the most powerful currency in the world. And one big reason is that the U.S. economy is still the largest and most resilient in the world.

Because of this, the US has an outsized effect on the rest of the world. With a fifth of the world’s GDP and the dominant currency, the dollar often drives the rest of the world’s currencies and not the other way around. In regard to a weaker dollar and your investments, you can expect the USD to weaken from its three year high and then to slowly inflate over the years. But, because other currencies will follow the same course that part will have little effect on specific stock sectors. The greater effect over the next couple of years will be how the pandemic plays out and the abilities of nations to display the discipline needed to cope with this health crisis and its effect on their economies.

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The USA is decreasing its dependence on foreign oil through investment in sustainable fracking technology. As the US moves toward being the world’s number one producer of oil and natural gas, the price of natural gas in the USA has fallen dramatically. This is great news for US consumers and a boost to the US economy. Money that is not spent on oil as gas is available for investment that will help drive economic expansion. The US oil and gas industry is seeing boom times that are likely to continue. Manufacturing is up. And, the Chinese Yuan is being allowed to float more widely in daily currency trading. The issue of a cheap Yuan has plagued US industry for years as a cheap Yuan has helped Chinese companies sell for less in the USA. A more expensive Yuan will make US products more competitive both in China itself and worldwide. To invest in the dollar, an investor does not need to buy dollars and put them in the bank. He simply uses his dollars to invest in dollar denominated investments, especially in the USA.

A Greek financial collapse is back on the table and with that comes the possibility of an exit from the European Union. Investors are concerned that if Greece defaults on its debt, Italy, Spain, Portugal, Ireland, or even France might be next. If a “domino effect” set of financial collapses is likely a run on banks in Europe would likely be next followed by a shutdown in credit across the world. On one hand the wins by socialists in elections in Europe have upset the painfully ironed out debt relief deals now in place. However, a change of approach that would avoid painful austerity measures could avert a recession. The cost would be inflation and a still less valuable Euro compared to the dollar. So, here we are back to the premise that to invest in the dollar in the weeks, months, and perhaps years to come may well be a good idea. Although we are not suggesting any specific investments it will probably be a good idea to look at which business sectors will benefit from a stronger dollar, which business sectors will benefit from less expensive energy prices, and which stocks are likely to rise as a consequence.

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