Diverging monetary policy globally and a stronger U.S. dollar continued to be key drivers of the recent underperformance and last week’s tumble in U.S. stocks. Some investors are reacting to this slump by focusing on domestic consumer stocks, but sluggish retail sales over the past few months are calling this strategy into question. Is the thinking wrong? Read more on my take in my weekly commentary.
Stronger Dollar Hurts U.S. Exporters
It is no coincidence that the U.S. Dollar Index is at a 12-year high, when U.S. stocks are essentially flat year-to-date. A cheaper currency is proving a boon for European and Japanese companies, but the stronger dollar is creating a problem for U.S. exporters by making U.S. goods more expensive. This headwind is further exacerbated by the already high valuations of U.S. stocks.
Without the tailwind of further multiple expansion––that is, investors paying more for each dollar of earnings, something that is harder to achieve with the Fed set to start raising interest rates––the market is left relying on earnings growth, where the rapid rise of the dollar is proving an impediment.
Consumers Not Playing to Script
Given the pressure on exporters and the recent strength in the labor market, it would seem reasonable to focus on companies selling to U.S. consumers. After all, not only are more jobs being created, but in this case, a stronger dollar is a lift to purchasing power. Unfortunately, the reality is not matching the thesis.