RES-9094A-A EXP 31 DEC 2017 © 2016 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.
A Stronger Dollar
and Fluctuating Stocks:
Are You Getting Mixed Signals?
Have you been following all the conflicting signals in recent market
news? The dollar rose sharply in 2015, but has since leveled off. Interest
rates remain low, but they have been varying and are likely to go up.
And stocks seem confused, rising one day and falling the next. Here’s
what you need to know to help keep your investments headed in the
right direction.
U.S. Dollar Index
150
140
130
120
110
100
90
80
70
20
15
20
00
20
03
20
06
20
09
20
12
97
19
94
19
91
19
88
19
85
19
82
19
19
79
19
76
60
19
73
A stronger dollar simply means that
you receive more yen, euros or other
foreign currency in exchange for
each dollar. Over time, the value of
the dollar fluctuates. Recently, it has
risen more quickly than usual against
other major currencies, also raising
questions about potential effects.
Source: Bloomberg; 5/31/2016.
What Is a ‘Strong Dollar’?
The U.S. Dollar Index indicates the general international value of the U.S. dollar and
consists of the trade-weighted average of six major world currencies.
Why Has the Dollar Risen?
Today’s rising value of the dollar reflects diverging conditions between the U.S. and the rest of the world.
Three major differences, or gaps, are:
1. Economic growth gap – The U.S. economy is
growing faster than the economies of most other
developed countries, attracting investment flows
from the rest of the world.
2.Interest rate gap – U.S. interest rates are actually
high compared to those in the rest of the world.
Many foreign central banks have introduced negative
short-term interest rates to spark economic growth,
while the Federal Reserve (Fed) has started to raise
interest rates. As a result, the gap between U.S. and
foreign interest rates may widen: U.S. rates are
expected to rise further, while foreign interest rates
are expected to decline even more.
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3.Inflation gap – Although lower oil prices have
reduced consumer price inflation more than
expected, wages have continued to increase
by about 2% per year. The U.S. has low inflation,
but the rest of the world worries about deflation
due to much higher unemployment rates and
stagnant growth.
The rising dollar can help close these gaps over time,
which is why currency values can vary sharply. As a
result, periods of dollar strength and weakness have
alternated, sometimes quickly.
Currency markets historically are more volatile than the stock market, with sharper ups and downs. And the stock
market rarely moves in unison with the value of the dollar. In fact, stocks have risen during both strong and weak
dollar trends in the past, although that’s not guaranteed in the future. But higher interest rates usually boost the
value of the dollar.
Stocks Have Risen During Past Dollar Strength and Weakness
Period of U.S.$ Rise/Fall
Change in U.S.$
Annualized Performance of the S&P 500
Jul ’80 – Mar ’85
54.8%
14.4%
Mar ’85 – Apr ’88
-38.9%
16.7%
Apr ’95 – Feb ’02
39.7%
13.7%
Feb ’02 – Dec ’04
-28.5%
5.0%
38.1%
13.5%
Aug ’11 – Jan ’16
Source: Bloomberg and Edward Jones. Past performance is no guarantee of future results. The S&P 500 index is unmanaged and is
not available for direct investment.
What Does a Stronger Dollar Mean?
The strong dollar reflects improving conditions in the
U.S., which are likely to lead to higher interest rates.
If the dollar continues to rise, you may benefit, too, if
you travel abroad or purchase items imported from
other countries. A stronger dollar also means:
• Slower earnings growth for international companies –
About 40% of S&P 500 sales originate overseas, so
large U.S. companies with international operations
have faced additional challenges as the dollar
appreciated in 2015, since their foreign sales
translated into fewer dollars. And this isn’t the first
time U.S. companies have weathered periods of
currency volatility – as the table shows, the S&P 500
posted positive returns in times when the dollar rose,
and then fell sharply. We believe the dollar will flatten
out in the interim, allowing company earnings to
accelerate in the second half of 2016.
• Lower prices for imported items – U.S. consumers
will pay lower prices for some imported products,
which is more good news for stretched consumer
budgets. And since consumer spending is almost 70%
of economic growth, lower prices help support overall
economic growth.
• Slower export growth – Exporters will find it difficult
to compete with similar products from other
countries, which could be a drag on U.S. growth.
While the contribution of exports has been
increasing, it’s still only about 13% of economic
growth. A strong dollar shifts winners and losers,
and since the U.S. imports more than it exports,
consumer-driven companies are likely to benefit.
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Investment Impacts
of Rising Interest Rates
The Fed has kept short-term interest rates very low
since late 2008. As the job market and economic
growth have improved, the Fed has emphasized that
rate hikes will depend on the strength of economic
data going forward.
The Fed’s focus on this data has had an unfortunate
consequence: the outsized reaction of stock and bond
prices to each economic release, as investors revise
their guesses about the timing of rate hikes going
forward. That’s contributed to increased volatility of
stock and bond prices recently.
Although you might think that rising interest rates are
“bad news,” we don’t think that’s the case. Historically,
while becoming more volatile, stocks have continued to
rise around the Fed’s first interest rate increase because
the economy is improving. And this time, the Fed isn’t
planning on increasing rates to try to slow down the
pace of an overheated economy. Instead, it’s cautiously
concluded that economic conditions are finally strong
enough to consider ending some of the extraordinary
steps taken during the financial crisis and start
returning monetary policy to normal.
RES-9094A-A EXP 31 DEC 2017 © 2016 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.
Investment Impacts of the Strong Dollar
Look for opportunities in the current investment environment and talk to your Edward Jones financial advisor
about actions that may be right for you.
■■ Rising Dollar – Remember that the strong dollar reflects the strength of the U.S. economy – and better
economic growth combined with earnings growth can support rising U.S. stock prices over time.
• Take advantage of the strong dollar by considering international equity investments if appropriate for your
portfolio. You may need to add them because the recent rise in the value of the dollar may have reduced your
international allocation below the recommended amount. We recommend that international stocks be up to
35% of your total equity investments and that the majority of your international holdings be in equities from
developed markets.
• Don’t ignore domestic investments – the value of the dollar, and other currencies, can reverse quickly.
■■ Varying Interest Rates – Instead of guessing when the Fed will raise interest rates next, prepare by:
• Setting realistic expectations for fixed-income returns at 3%–4.5% over the long term
• Keeping enough in cash
• Putting 85% of your fixed-income portfolio in short- and intermediate-term investments
• Maintaining a well-diversified bond portfolio
■■ Fluctuating Stocks – We think stock market volatility is likely to stay high due to the heightened focus on
every new economic release. Make sure you’re ready for a bumpy ride and don’t get thrown off course. If you
haven’t recently reviewed your portfolio, you may find changes in your comfort level with risk, your situation
or your goals.
• You may need to rebalance your portfolio to the target mix of stocks, bonds, international investments and
cash that’s appropriate for you. That can make it easier to stay invested and to look for opportunities when
headlines are confusing.
• Consider investment-grade bonds to help stabilize the value of your portfolio. They tend to rise when stocks
fall, which can reduce the volatility of your portfolio and help you stay invested.
Remember that short-term market volatility doesn’t
usually indicate a gloomy long-term outlook. We think
a stronger dollar, supported by the potential for rising
short-term interest rates, is a positive sign.
Before investing, make sure you understand the risks, including loss of principal. Special risks are inherent to international investing,
including those related to currency fluctuations and foreign political and economic events.
Kate Warne, Ph.D., CFA Investment Strategist
PAGE 3 OF 3
www.edwardjones.com
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RES-9094A-A EXP 31 DEC 2017 © 2016 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.
Don’t Get Your Signals Crossed