Over the last nine months, the US dollar has strengthened versus the Euro by 25% to levels not seen since 2003.
- Last summer one Euro cost 1.36 U.S. dollars
- Today one Euro costs only 1.06 U.S. dollars
This dramatic decrease in the value of the Euro versus the U.S. dollar is illustrated in the chart below. When the blue line is declining, the U.S. dollar is getting stronger.
What is driving the strength in the dollar?
- The U.S. economy has been solid, while Europe’s economy has been weak.
- US interest rates are still higher than most European countries.
- The US has terminated its quantitative easing (QE) programs, and Europe is just starting theirs.
Who are the winners in this situation?
- The U.S. consumer is the big winner when the dollar is strong. All those products we buy that are manufactured overseas are now cheaper.
- International travelers because a hotel room in Rome that was $200 per night last year is now $150.
Losers on the other hand are:
- US companies which sell products overseas. Their prices seems higher over there, and foreign profits are now worth less.
- Commodity prices because when the dollar strengthens, the prices of commodities generally drop (think oil, copper, steel, etc.)
We have been forecasting a flat US stock market this year. One of the reasons behind this is the expectation that the stronger dollar will slow earnings growth for many US multinational companies.
The Gradient 50 owns many blue-chip multinationals. As many of them generate a third or more of their sales internationally, near term estimates have been moderated due to the strong dollar.
- International sales growth is curbed by higher prices for goods made in the US.
- Foreign earnings will be translated back to US dollars.
Does this mean we should be selling our G50 stocks? No. With dividends currently providing a 3.5% yield, we continue to believe that the G50 is a good choice for income and growth investors. We expect them to continue to be rewarded over the long haul.
As of April 10, 2015:
Dow Jones US Moderately Conservative Index is up 2.86% (TR) for the year
S&P 500 closed at 2,102.06 up 2.10% for the year
U.S. 10 year Treasury Futures are yielding 1.95% down 0.22% for the year
WTI Crude Oil futures closed at $51.64 down $2.07 for the year
Gold closed at $1,204 per ounce up $21.70 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.