For the last several weeks (and to be honest months) there's been tons of talk on the strengthening US Dollar. Among other market forces, the Dollar has been strengthening as the US is coming close to the end of QE (whatever number it is now) while many other major economies are easing. Some like Europe sound like they are just getting started when it comes to monetary easing too! I was curious to see if there was any correlation between a strengthening USD and performance of the S&P 500. Monthly returns were used with several different time periods in mind. That's why you see multiple correlations. Explanations behind the dates chosen are as follows: Dollar and Trade Weighted Dollar data I found went back to January 1995, so I did one test since inception, if you will. March '09 was when the market bottomed after the financial crisis, so the second is since the current bull market began. Lastly, May 2013 was when then Fed Chair Ben Bernanke first said "tapering." Given the weights in the DXY, I chose to specifically look at the correlations between the Trade Weighted Dollar and the S&P 500. Additionally, all correlations are statistically significant at a 5% level of significance. Check out the pictures below for plots of monthly S&P 500 returns with inverted monthly returns of the Trade Weighted Dollar.
As you can see there are statically significant negative correlations between monthly returns on the trade weighted dollar and the S&P 500 during all time periods. It's also interesting to see the recent divergence in August (last chart provides best view). Will this divergence continue? Or will the gap be closed? I'm pretty bullish on the USD at the moment given relative economic strength here. However, could too much Dollar strength eat into the profits of domestic companies that operate internationally, causing slower earnings growth? Remember, when the Dollar strengthens domestic exports become less competitive overseas. Since I think the US is still a good place to invest (I know, I know...tons of international markets have lower valuations, which should make them more attractive), I would recommend focusing on purely domestic stocks vs. multinationals.
Going to run some regressions next to see if I come to the same conclusions, but I wanted to get my initial thoughts down on paper...more to come later, but for now caveat emptor when it comes to investing in multinational companies!!!!
Going to run some regressions next to see if I come to the same conclusions, but I wanted to get my initial thoughts down on paper...more to come later, but for now caveat emptor when it comes to investing in multinational companies!!!!