Why You'll Actually Be Richer When the Dollar Is Worth Less
NEW YORK -- The great thing about pain is that the moment it stops, you feel better. And the agony the strong dollar inflicted on stocks -- and consequently, your portfolio -- may soon be over.
The U.S. Dollar Index, which measures the greenback against major world currencies, surged 22 percent from July 2014 through mid-March, according to data from the Federal Reserve Bank of St. Louis. It stalled then, however, and has moved in a mostly sideways range since.
The reason the rally had such a destructive impact on stocks is that it crushed reported earnings. For big companies, the rest of the world is just as important as domestic U.S. sales. In fact, for the members of the Standard & Poor's 500 Index and the SPDR S&P 500 (SPY) exchange-traded fund that tracks the index, non-dollar revenue amounted to 48 percent of total sales in 2014, according to S&P Dow Jones Indices.
Put another way, for large multinationals, approximately one out of every two dollars in revenue came from outside the U.S. So when companies reported their financial results at the end of each quarter, the stronger dollar meant even robust businesses started to look bad when compared to the prior year. First, sales in overseas currencies were worth less when converted to dollars. And second, dollar-denominated sales declined because customers shied away from the higher costs.
So the dollar's stall is good news for stocks. Even if the dollar doesn't weaken, starting in March 2016, the year-over-year comparisons for quarterly earnings reports will be easier. Sure, some companies will be affected more and some less, depending on exactly where their sales come from. But the conversion of euros, pounds and yen back into dollars won't be universally damaging across the board. Better than that, because investors tend to look forward by approximately nine months, the positive effects are probably already starting.
There is a risk that the dollar will start to climb once again, and if it does, then year-over-year comparisons will start to deteriorate once more. Why could that happen? For one, if the European Central Bank expands its money printing program, then the euro will weaken, and the dollar will be stronger.
In a recent report, Brown Brothers Harriman references "growing expectation" that such a thing may occur. It just hasn't happened yet -- and may never -- because, as PNC says, "the Eurozone's consumers in 2015 are still their most upbeat since before the Great Recession in 2007."
To be sure, there are a lot of problems outside the United States, many of which could dampen that outlook: continued weakness in southern Europe, the sluggish Japanese economy and the dramatic slowdown in China and resource-based economies like Australia and Canada.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.