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The resurgent dollar could hurt S&P 500 earnings

By Steve Rothwell

Associated Press

Published: Sunday, March 31 2013 12:22 p.m. MDT

The MSCI emerging markets index, a benchmark of stocks in developing countries, including Brazil, South Korea and China, is down 1 percent this year before accounting for changes in currency rates. When measured in dollar terms, the loss widens to 2.1 percent. That's because the currencies of those countries have fallen in value against the dollar.

HOME SWEET HOME

If you're worried about the dollar rising, telecommunications companies like AT&T and utility companies like Duke Energy offer a haven.

These companies are shielded from the impact of a stronger dollar because almost all of their sales are in the U.S.

Utility stocks have risen 5.1 percent in the past month, the second-best performing industry group in the S&P 500.

BIGGER GAINS FOR THE SMALL

Smaller companies make fewer sales overseas than large multinationals, so they aren't affected as much by the strengthening dollar, says Phil Orlando, chief equity strategist at Federated Investors.

The Russell 2000 Index, which tracks small companies, has risen 12 percent since the start of the year, outperforming the 10 percent advance for the S&P 500.

Gains in small companies have been led by health care stocks like Keryx Biopharmaceuticals, which has risen 170 percent since the start of the year, and Coronado Biosciences, which is up 116 percent.

WIDER BENEFITS

A gradually strengthening dollar is good for the stock market as a whole, and will outweigh the initial impact on earnings, says David Bianco, the head of U.S. equity strategy for Deutsche Bank.

As the dollar rises, it lowers the cost of imports, holding down inflation. That, in turn, makes it easier for the Federal Reserve to keep interest rates low.

Because investors love the stability that low interest rates and tame inflation bring, they will be more willing to own stocks. That will push up stock prices even if corporate earnings don't increase, Bianco says.

Deutsche Bank analysts forecast that the dollar will strengthen to $1.20 against the euro by the end of the year, or about 7 percent, from its current level of $1.29. By the end of next year, they see the dollar strengthening to $1.15 against the euro.

"I'd welcome a stronger dollar," Bianco says. "It contains the risk of any surge in interest rates, or inflation risk."

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