Strong dollar, weak profits

gas pumpOil prices are getting all the blame for the recent U.S. stock market downturn, but it’s hard to see the connection when so many companies and consumers benefit from low energy costs. A better culprit is the strong dollar.

The accompanying chart shows how strong the dollar has become compared with a basket of international currencies; it shows roughly a 15% appreciation since mid-2014. Economists will tell you that this represents a vote of confidence from the international community in our economy, which should probably be a point of pride. But when the dollar is strong internationally, that also means that when American companies sell their products outside of the U.S., the products are either priced higher or the company has to discount the price to maintain pricing parity. At the same time, the strong dollar reduces the conversion of profits abroad from foreign currencies into dollars.

Either you lose sales because of noncompetitive pricing, which reduces profits, or you reduce margins, which reduces profits. Heads, large American companies with significant business overseas lose, and tails—well, you get the idea, and the lower conversion rate adds to the short-term pain. Those large American companies most affected happen to make up much of the Dow Jones Industrial Average and the Standard & Poors 500 index.

CA - 2016-2-2 - Strong DollarWhen you buy a stock, fundamentally what you’re buying is a claim on the company’s current and future earnings and profits, which can be returned to you in the form of dividends, or returned indirectly as the company invests in plant, equipment or other expansion which can drive future profits higher and make the company (and its stock) more valuable. When earnings and profits decline temporarily, people regard those companies as temporarily less valuable than they had been with higher earnings and profits. This is why short-term traders pay so much attention to “earnings season,” as it’s called, when companies disclose their balance sheets.

The key word in all this is “temporary.” While oil prices seem to be stuck in the middle of a glut, the value of a dollar on the world markets may be peaking, and have nowhere to go but down. That, in turn, could reverse the earnings and profits slide, companies could snap back to their former values, and stocks could do what they always seem to do after declines: reverse course and eventually test new highs.


About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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