"No warning can save people determined to grow suddently rich" - Lord Overstone

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Is The Strong Dollar a Showstopper for Stock Bulls?

Easy To Blame The Dollar

During the May 26 selloff in stocks, we heard numerous "blame it on the strong dollar" comments similar to the one below via CNBC:

"I think the pressure today is coming from the stronger dollar," said Peter Cardillo, chief market economist at Rockwell Global Capital. "The focus this week is the yield curve and the stronger dollar."


Stocks Gained Over 70% With Strong Greenback

While the value of the U.S. dollar impacts countless areas in the global economy, a logical question is how concerned should equity investors be about a strong dollar? As shown in the chart below, the S&P 500 gained over 70% during a period of U.S. dollar strength between 1982 and 1984. Therefore, taken in isolation, a strong dollar is not a reason to cash in your stock portfolio.

US Dollar Monthly Chart 1982-1985


A Bigger Concern Is The Length Of The Bull Run

Regardless of the dollar's impact, there are three reasons telling investors now is a good time to water test their portfolio for the next inevitable bear market:

  1. The bull market is quite mature in historical terms.
  2. Bear markets can wipe out gains quickly.
  3. A new and different landscape may be emerging as interest rates come off of multi-decade lows.


Back To History And The Dollar

Can we find another period in recent history when stocks and the U.S. dollar rose simultaneously? Sure we can - as shown below, the S&P 500 nearly tripled in value between 1995 and early 2000. Over the same period, the U.S. dollar surged over 25%.

US Dollar Weekly Chart 1995-2000


Investment Implications - The Weight Of The Evidence

Tuesday's big drop in stocks did not constitute a material change to the hard evidence when viewed on our investment time horizon.

Chris Ciovacco Tweet

With a big GDP number coming Friday, it is important to remain flexible and open-minded. The market will guide us if we are willing to listen.

 

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