Yahoo Finance How a Stronger US Dollar Has Affected Large-Cap Stocks
3 Portfolio Moves You Should Consider Now (Part 2 of 6)
So far, 2015 is broadly developing as we predicted back in January, divergence being the central theme. The Federal Reserve (or the Fed) is preparing a course for higher interest rates, just as the central banks in Europe and Japan are doing the opposite.
This dynamic, however, has contributed to some of the surprises of 2015, including the rapid strengthening of the U.S. dollar. The stronger dollar helps explain why U.S. stocks have seen relatively lackluster performance, while stocks in Europe and Japan have done much better.
Market Realist – A stronger dollar has affected large-cap stocks negatively.
As we discussed in the previous part of this series, the central bank policy divergence has caused the dollar (UUP) to strengthen against major currencies, including the euro and the yen.
The US stronger dollar has a double-whammy effect on large-cap stocks. Not only do their products look less attractive to foreigners, but they also have to deal with translation losses unless they’ve hedged their currency exposure. The earnings of Johnson & Johnson (JNJ), for example, have been hit by 7.2% due to a stronger dollar even though the company beat earnings estimates.
As a result, small caps—which are driven by domestic sales—have outperformed large caps. The graph above compares the performance of the SDPR S&P 500 ETF Trust (SPY), which tracks the S&P 500, with the iShares Russell 2000 ETF (IWM), which tracks small-cap stocks. They have given returns of 10.1% and 20.0%, respectively.
The stronger dollar has affected large-cap stocks in Europe as well. Large European firms have reaped gains from a weaker euro. Sanofi (SNY), a French drugmaker, reckons that foreign-exchange movements added three percentage points to its revenue growth in 4Q14.
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