Monday Morning: Seeking havens from the weak dollar

The dollar has been slipping against the major currencies, and as noted in this column last week, that weakness has implications for investors.

Several readers asked for more information on the likely impact of a weak dollar on U.S. equities, and happily, the Leuthold Group in Minneapolis has just published a review of the past performance of U.S. stocks in weak-dollar periods.

The analysis, in the June issue of the group’s publication Perception, shows that since 1970, stock market performance generally has been positive – but not outstanding – during periods of dollar weakness. On average, the market has gained 7.1% compounded in such periods. That’s 2 percentage points below the historic return of 9.1% compounded annually since 1970, the analysis notes.

variable outcomes

However, the annualized return has varied between a 1% loss and a 14.2% gain. During the periods examined, the dollar declined 25% on average.

The analysis warns that the effect of a weak dollar could be greater this time if it causes an outflow of foreign capital, because foreign investors today hold a far larger share of U.S. equities than they did in 1970. In fact, foreign ownership of U.S. equities has almost doubled since 1991.

Despite the relatively weak overall performance of U.S. stocks in past periods of U.S. dollar weakness, some sectors of the market have performed remarkably well during such periods.

The top sector in such periods has been soft drinks, which returned 24.65% a year over the six periods examined. They experienced no negative-return periods.

“The benefit of a weak dollar can be significant to the bottom line,” the Leuthold report notes. “Coca-Cola [KO] currently has 61% of total sales in overseas markets. Also, more than half of all sales booked by the U.S. semiconductor companies are to foreign customers.”

Other sectors that have performed well during weak-dollar periods are personal care, up 22.36% per year, with no negative-return periods; semiconductors, up 19.81%, with one negative period; housewares and specialties, up 19.69%, with no negative periods; household products and appliances, up 19.5%, with one negative period; and diversified health care, up 19.49%, with no negative periods.

Other sectors that have performed well include pharmaceuticals, tobacco companies, brewers, software makers, restaurants, movies and entertainment, and oil- and gas-drilling equipment.

sectors differ

The study notes that there are two different kinds of sectors on the list. Some, such as soft drinks and semiconductors, benefit substantially when foreign demand rises (because the price of the U.S. product in foreign markets falls as the dollar falls). Other sectors benefit because U.S. investors move toward defensive stocks.

The report warns that the dynamics of virtually all industries have changed during the past 30 years, so the old rules may no longer apply.

The sectors that have performed worst in periods of dollar weakness include hospital management, down 7% annually; trucks and parts, down 3.84%; iron and steel, down 3.21%; and homebuilding, down 2.79%.

The events of last week, with the market generally sliding, suggest foreign investors may be giving up on the U.S. market because of the weak dollar and “Enronitis.” So, as the Leuthold Group report suggests, the impact of the dollar’s weakness could be worse this time than it has been, on average, in the past.

The question is, will it approach the June 1976 to October 1978 period, when the dollar lost 23% of its value, and the market recorded a compound annual decline of 1%?

Given all the uncertainty plaguing the market, the economy and world events, it just might.

Mike Clowes is the editorial director of InvestmentNews and sister publication Pensions & Investments.