Trader’s Narrative

The usual assumption is that with a weak dollar, the US stock market is doomed. That no one will want to invest in US equity because they will be “swimming upstream” — that is, they will have to not only make a profit in US dollars but above and beyond the depreciation of the dollar so that in their home currency they come out ahead.

But there is a paradoxical way that a weak dollar helps the stock market: through overseas earnings. With the increase in globalization, each year a higher percentage of earnings comes from international operations of US companies.

Dow Industrial stocks like 3M (MMM) or Coca-Cola (KP) are classic examples. As these companies earn revenue in Euros, Yen and other stronger currencies, their US dollar earnings will balloon. Of course, there are always exceptions. Companies like AT&T (T) or Home Depot (HD) operate only in the US.

Also, periods of US dollar weakness do not correlate with negative stock market performance. For an example we don’t have to look very far. Since 2002, even though the US dollar has relentlessly fallen, we’ve witnessed a strong and equally unrelenting bull market in equities.

I’m not an automatic dollar bear (as I’ve mentioned before, the dollar may surprise everyone as it has before) but even if the dollar does continue to decline, I don’t think that will necessarily mean that investing in US equities is a losing proposition.