Businesses like to use this excuse for low income. Do not believe it.
The US dollar strengthens against foreign currencies. But only nine companies in the
can make a convincing case that a stronger dollar will hurt their income.
This is the conclusion I drew from an in-depth analysis of stocks that have summer significantly correlated with
US dollar index,
who reflects the dollar’s value against a basket of major foreign currencies. The index has gained 7.1% so far this year, an unusually rapid rate of growth.
It is familiar why a strong dollar is bad for US stocks. S&P 500 companies derive 40% of their revenue from outside the United States. So when the dollar strengthens, the value of non-dollar income decreases. In the recently ended earnings season, a number of companies have already warned of the potential negative impact of a stronger dollar, and some predict that it will play an even bigger role in the coming seasons. results.
I don’t buy it. In most cases, the stronger dollar is nothing more than a convenient excuse for executives to blame for missing their earning targets.
The most obvious proof that a strong dollar doesn’t automatically herald the ruin of US stocks is the market’s performance so far this year. Despite an unusually strong rise in the US dollar index, the S&P 500 has produced a year-to-date total return of 24%, nearly triple its historical average.
This is only a data point, but the same conclusion has emerged when analyzing the past four decades. The extent to which monthly changes in the US dollar index can explain or predict the corresponding changes in the S&P 500 is practically nil. In statistical terms, the r-squared of this correlation is less than 1%. (A 100% r-squared would mean that changes in the dollar index are able to completely predict changes in the S&P 500; a 0% r-squared would mean it does not have this ability.)
There are undoubtedly several reasons for this very weak correlation. The first is that accounting for the high percentage of income from overseas ignores the expense side of the ledger. Many of the same multinational corporations with much of their income coming from outside the United States also have large overseas transactions that are processed in currencies other than the dollar.
I was unable to determine the percentage of all S&P 500 company spending that is made abroad. But we know that if a stronger dollar negatively impacts the sales value of these multinationals, it positively impacts their spending.
In addition, many multinationals cover any currency risk that remains after offsetting their income and expenses. Depending on how these hedges are constructed, it is quite normal that fluctuations in the dollar have little immediate impact on a company’s bottom line or stock price.
The low r-squared I calculated for the dollar’s correlation with the S&P 500 reflects a composite of all stocks in the index. This average can hide considerable variations between individual businesses, with some being affected by a stronger dollar and others being helped. To investigate this possibility, I calculated the correlation of the monthly changes of each individual stock since 2000 with those of the US dollar index (ignoring companies that were not publicly traded during that two-year period. decades).
To find the companies most affected by the strength of the dollar, I set an r-squared threshold for a stock at 10% or more, which is still a fairly small hurdle to overcome. This means that a stock could qualify even if 90% of its monthly fluctuations have nothing to do with changes in the exchange value of the dollar.
To put this threshold into context, consider what the comparable r-squared would be for gold bars, which are known to be sensitive to dollar strength and weakness. The r-squared of the correlation between the monthly changes in gold and the dollar index since 2000 is 18%.
There were nine stocks with an r-squared greater than 10%. All of them were inversely correlated to the US dollar index, meaning that a stronger dollar hurt them and a weaker dollar helped them. The nine are listed below, in descending order of their r-squares.
|Company / Teletypewriter||Inverse correlation with the US dollar index *||Cumulative gain over the year **|
|Freeport-McMoRan / FCX||18.25%||44.0%|
|Hartford Financial Services Group / HIG||15.61||43.9|
|Caterpillar / CAT||14.81||11.5|
|Eastman Chemical / REM||13.16||12.2|
|Schlumberger SA / SLB||12.89||37.8|
|Prologis / PLD||12.5||52.8|
|Deere / DE||11.00||34.6|
|Aflac / AFL||10.09||28.1|
|EstÃ©e Lauder Class A / EL||10.02||26.2|
|S&P 500 *||0.96||24.0|
* As measured by the r-squared of the correlation of the monthly returns since 2000 of the stock and the DXY index. ** Until 11/26/2021
Sources: FactSet; Evaluations of Hulbert
The year-to-date gains of these nine stocks help me argue that the dollar is not one of the most important factors you should focus on. Even for these stocks strongly inversely correlated to the dollar index, seven out of nine have nevertheless outperformed the market this year.
Consider what that means: Even though you knew at the start of the year that the dollar index would rise sharply in 2021, and even though you knew which companies have historically been hit the hardest by a stronger dollar, your bets on the stock picking would always have been more wrong than good.
Mark Hulbert is a regular contributor to Barron’s. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected].
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