Strong
The Fatal
Dollar,
Disconnect
Weak Profits
Oil prices are getting all the blame for the recent U.S. stock market
downturn, but it’s hard to see the connection when so many companies
and consumers benefit from low energy costs. A better culprit is the
strong dollar.
The accompanying chart shows how strong the dollar has become
compared with a basket of international currencies; it shows roughly a
15% appreciation since mid-2014.
2016
Economists will tell you that this represents a vote of confidence from
the international community in our economy, which should probably be
a point of pride. But when the dollar is strong internationally, that also
means that when American companies sell their products outside of the
U.S., the products are either priced higher or the company has to
discount the price to maintain pricing parity. At the same time, the
strong dollar reduces the conversion of profits abroad from foreign
currencies into dollars.
Either you lose sales because of uncompetitive pricing, which reduces
profits, or you reduce margins, which reduces profits. Heads, large
American companies with significant business overseas lose, and
tails—well, you get the idea, and the lower conversion rate adds to the
short-term pain. Those large American companies most affected
happen to make up much of the Dow Jones Industrial Average and the
Standard & Poors 500 index.
When you buy a stock, fundamentally what you’re buying is a claim on
the company’s current and future earnings and profits, which can be
returned to you in the form of dividends, or returned indirectly as the
company invests in plant, equipment or other expansion which can
drive future profits higher and make the company (and its stock) more
valuable. When earnings and profits decline temporarily, people regard
those companies as temporarily less valuable than they had been with
higher earnings and profits. This is why short-term traders pay so much
attention to “earnings season,” as it’s called, when companies disclose
their balance sheets.
The key word in all this is “temporary.” While oil prices seem to be
stuck in the middle of a glut, the value of a dollar on the world markets
may be peaking, and have nowhere to go but down. That, in turn, could
reverse the earnings and profits slide, companies could snap back to
their former values, and stocks could do what they always seem to do
after declines: reverse course and eventually test new highs.
Source:
http://www.mauldineconomics.com/connecting-the-dots/the-dollar-dog-atecorporate-americas-homework-6-casualties-of-the-strong-u
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