Here’s What a Falling U.S. Dollar Means For The Stock Market

The U.S. dollar is falling out of bed. Following a huge Federal Reserve hike in June 2018, President Trump attacked the Federal Reserve Bank and the U.S. dollar, calling the greenback “too strong” in recent tweets. Since then, the dollar has been falling, but what does that mean for investors?

Currency specialists like Mark Sebastian of Global Currency Advisors contend that a falling dollar is good for U.S. companies, but the current bearish sentiment on the U.S. dollar may prove unwarranted and knock some Fortune 500 stocks off their pedestals.

Rome Wasn’t Built in a Day, and Neither Was The Stock Market

We’ve seen a similar thing before, and although we know what happened, it’s never good to jump to conclusions. Back in 2013, the stock market crashed after then-Fed chairman Ben Bernanke hinted that the U.S. might start to scale back the stimulus (quantitative easing) it was pumping into the economy as part of its efforts to end the financial crisis.

At the time, many thought the stock market would never rebound. But even though the Fed was starting to unwind stimulus, it was unclear as to how much they would be able to throttle back without further weakening the U.S. dollar. The currency began to fall in late 2012, amid growing concerns about over-capitalized stock markets, and after a rough start to 2013, the S&P 500 clawed its way back to closing over 1,500 before the sell-off all but ended the stock market’s run.

The lesson from 2013 and 2019 is that it takes time to turn a rally into a downturn and it depends on market forces. While the U.S. economy is actually in a better shape now than it was in 2009, a bigger role played by the China slowdown and a weaker Chinese yuan have reduced expectations for a significant rise in the U.S. dollar. In addition, a significantly slowing trade war with China and Russia may also keep the dollar under downward pressure. The biggest determinant of how much the U.S. dollar will fall will be the results of the 2019 midterm elections.

Traders and investors shouldn’t abandon ship and switch their focus to French and Japanese elections. Although the U.S. elections are a potential future event that could boost the dollar, in the short term, the greatest risk to the U.S. dollar is that the currently bearish sentiment toward the U.S. dollar could prove unwarranted. A lightening up on bearish bets on the dollar will not only help companies that generate most of their income in dollars (like the non-U.S. multinationals in the S&P 500), but it could also move some stocks off their pedestals.

Over the long term, investors may well be better off sticking with domestic stocks that generate most of their revenue in dollars (like the U.S. multinationals in the S&P 500). However, there is no right or wrong answer. It all depends on risk appetite and timing.

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