Last week we discussed the recent weakness in the US dollar, putting it in a historical context; today we want to hit this theme again and extend it to the relationship between the greenback and the US equity market. Three points on this:
#1: Just to reiterate, we are not especially perturbed by the recent weakness in the dollar because 1) we had a spike high during the depths of the COVID Crisis and 2) history says the dollar weakens after similar shocks. Here is a chart of the trade-weighted dollar back to 2006 which shows both points well. Those peaks you see in early 2009 and 2020 correspond literally to the day when the S&P 500 made its post-Financial and -COVID Crisis lows.
Takeaway: the dollar weakened by 16% in the 2 years after its March 2009 highs and it’s reasonable to expect this will happen again in 2021/2022 as the global economy slowly recovers from the COVID Crisis. That would take the Trade Weighted Dollar Index back to 106-107, which is essentially where it was in early 2018.
#2: The S&P 500 did reasonably well after the Financial Crisis regardless of whether the dollar was in a strengthening or weakening phase:
- Weaker dollar: 2009 (+26% total return for the S&P), 2010 (+15%)
- Stable dollar: 2011 (+2%), 2012 (+16%), 2013 (+32%)
- Stronger dollar: 2014 (+14%), 2015 (+1%), 2016 (+12%)
- Weaker dollar: 2017 (+22%)
- Stable dollar: 2018 (-4%), 2019 (+31%)
Takeaway: there is no long-run correlation between how the dollar trades in any given year and how US equities perform.
#3: Even though the dollar’s vagaries over the last 12 years have not had a meaningful impact on stock prices, the greenback’s value certainly does feed into corporate profitability. Simply put, the more non-US revenue a company has the better a weaker dollar will be for profitability everything else equal. The companies of the S&P 500 draw in a total 40% of their top line from non-US sources but the proportion of these offshore revenues varies widely by industry group.
Here is FactSet’s breakdown of S&P 500 sector revenues by US/International sources:
Takeaway: Technology, Communication Services and Consumer Staples are the larger sectors that have greater than average exposure to a weaker dollar. Energy and Materials also have +40% non-US revenues, but their weightings only total 5% of the S&P 500 versus 45% for the Tech, Comm Services and Staples. A weaker dollar is therefore one more investment positive for Big Tech (as if it needed any more after last week’s earnings).
S&P Total Returns by year (courtesy of Aswath Damodaran): http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html