What Does A Weaker US Dollar Mean For Stocks?
As the US dollar index
hits multi-year lows, many investors are wondering how the US equity markets
will be affected. Well, there are essentially two things to consider: a) Will domestic companies’ bottom line
benefit from a weaker currency? and b) Will
foreigners continue to hold their US equities, as any potential returns on
stocks will now be offset by losses in the dollar?
a) Typically, US-based companies benefit from a
weaker dollar, as their goods become cheaper relative to those of their foreign
competitors, both domestically and abroad. However, there needs to be demand for
these goods–which doesn’t seem to exist right now, as the global economy, with
a few exceptions, is currently idling. So for the time being, US companies’
bottom line won’t benefit from a weaker dollar. However, should the global
economy start to pick up, a weak dollar might benefit US businesses as their
goods will be cheaper relative to those of their competitors.
b) Foreigners own about 10% of the US equity market
but are unlikely shift their money out of the US stock market because of the
limited opportunities in the world’s other equity markets–as I mentioned above,
the global economy is currently on idle.
However, since foreign ownership in the US bond markets is
roughly four times as great as in the stock market, investors should be more
concerned with foreign investor confidence in the US fixed income markets–as
any significant foreigner-induced sell off in bonds could then adversely affect
stocks. These foreign bond portfolios are mainly comprised of Treasuries,
because of their risk-free nature. And the only factor that would undermine this
safe haven characteristic of US government debt would be if a catastrophic event
occurs in the US.
So for the time being, investors should not be too
concerned about a weaker dollar affecting the US stock market.
