Tuesday, August 4, 2020
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A big impact on profits, but not stock prices.
Over the last few weeks, a big story in financial markets has been the decline in the value of the U.S. dollar.
After hitting a post-crisis high on March 23 — the same day stocks bottomed — the dollar has been sliding and now trades at its lowest level in over two years.
And as happens when the dollar slides, much digital ink is spilled about whether this decline signals the end of the dollar’s reign as the world’s reserve currency. And questions arise about whether this drop in the dollar’s value threatens to derail the market’s recent rally.
But analysts on Wall Street are sanguine on the dollar’s global status and what a weaker dollar might mean for stock prices in the months ahead.
In an email to clients on Monday, Nicholas Colas, co-founder of DataTrek Research, looked at the market’s performance during periods of a rising or falling dollar since the 2008 financial crisis. And the takeaway for the market’s overall performance is clear — “there is no long-run correlation between how the dollar trades in any given year and how US equities perform,” Colas writes.
Now, while a weaker dollar doesn’t tend to drive the market broadly, it can have a big impact on individual company and sector-level results. And in short, the less U.S. exposure a company has the better as currency adjustments flatter profits after foreign sales are converted back to dollars.
Citing data from FactSet, Colas notes that utilities, real estate, and financials have the least geographically diverse revenue streams, with these sectors deriving 98%, 82%, and 78% of their revenues from the U.S. The materials and technology sectors, in contrast, get more than half of their revenues from abroad.
And as Goldman Sachs equity strategist David Kostin outlined in a note to clients last month, a weaker dollar environment could exacerbate trends we’ve seen predominate in the market. Namely, the outperformance of growth, tech, and momentum stocks while cyclical sectors underperform.
“During months when the trade-weighted USD fell by at least 1.25%, the international-facing Info Tech and Energy sectors have performed best while the more domestic-facing Consumer Discretionary sector has performed worst,” Kostin writes.
“From a factor perspective, Momentum, Growth, and attributes of ‘quality stocks’ have performed best during weakening USD environments,” he adds. “Our long/short Momentum factor has returned a median of 1.2% in months where the USD fell by 1.25%. Firms with the strongest growth profiles typically outperform weak growth sector peers by 0.6% in weaker USD periods, far exceeding their performance of -0.7% in environments with a sharply rising USD.”
And when it comes to whether this weakening dollar environment signals long-term trouble for the greenback, context matters. John Stoltzfus, chief investment strategy at Oppenheimer Asset Management, said in a note to clients that the U.S.-China trade war and the initial shock from the pandemic had pushed the dollar to “levels of extreme overvaluation” over the last two years.
Against this backdrop, then, the dollar’s decline from recent highs looks more modest. Moreover, the post-COVID global economic recovery markets are anticipating is likely to be negative for the dollar. “With prospects increasing for a global economic recovery to emerge once the spread of the virus is stemmed, foreign currencies have begun to strengthen against the dollar,” Stoltzfus writes.
As for predictions that this spells trouble for the dollar’s global status? Well, we’ve seen this movie before.
“We also view projections that the dollar’s current weakness could lead to a substantial curtailing of its role as the world’s lead reserve currency to be premature and likely to be ultimately proven erroneous as similar calls over the past nearly 40 years have been,” Stoltzfus writes. “Transparency, governance and accountability, which the US has been recognized to have by those who depend on reserve currencies, are what history has shown determines the perseverance of a particular reserve currency.”
What to watch today
10:00 a.m. ET: Factory orders, June (5.0% expected, 8.0% in May)
10:00 a.m. ET: Durable goods orders, June final (7.3% expected; 7.3% prior)
10:00 a.m. ET: Capital goods orders, non-defense excluding aircraft, June final (3.3% prior)
10:00 a.m. ET: Capital goods shipments, non-defense excluding aircraft, June final (3.4% prior)
6:15 a.m. ET: Cinemark Holdings (CNK) is expected to report an adjusted loss of $1.59 per share on revenue of $9.53 million
6:30 a.m. ET: Warner Music Group (WMG) is expected to report an adjusted loss of 1 cent per share on revenue of $980.27 million
6:50 a.m. ET: KKR & Co (KKR) is expected to report adjusted earnings of 36 cents per share on revenue of $818.8 million
7:30 a.m. ET: Vulcan Materials (VMC) is expected to report adjusted earnings of $1.38 per share on revenue of $1.3 billion
8:00 a.m. ET: Ralph Lauren (RL) is expected to report an adjusted loss of $1.73 per share on revenue of $610.56 million
4:00 p.m. ET: Wynn Resorts (WYNN) is expected to report an adjusted loss of $4.94 per share on revenue of $213.5 million
4:05 p.m. ET: Twilio (TWLO) is expected to report an adjusted loss of 9 cents per share on revenue of $368.17 million
4:05 p.m. ET: Activision Blizzard (ATVI) is expected to report adjusted earnings of 69 cents per share on revenue of $1.7 billion
4:05 p.m. ET: Disney (DIS) is expected to report an adjusted loss of 60 cents per share on revenue of $12.42 billion
4:05 p.m. ET: Beyond Meat (BYND) is expected to report an adjusted loss of 2 cents per share on revenue of $99 million
4:05 p.m. ET: Planet Fitness (PLNT) is expected to report an adjusted loss of 17 cents per share on revenue of $38.1 million
4:10 p.m. ET: Match Group (MTCH) is expected to report adjusted earnings of 45 cents per share on revenue of $531.3 million
4:25 p.m. ET: Allstate (ALL) is expected to report adjusted earnings of $1.58 per share on revenue of $10.8 billion
After market close: Nikola (NKLA) is expected to report an adjusted loss of 13 cents per share on revenue of $100,000
BP halves dividend as it swings to record $6.7B loss [Yahoo Finance UK]
Diageo sales down as global spirits demand falls — except in North America [Yahoo Finance UK]
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