The strong U.S. dollar has been bad news for most investors. This is unfortunate because the appreciating dollar has been easy to detect for well over a year. It’s not about a strong U.S. economy as many pundits like to state. The U.S. economy is far from strong. It’s about relative strength against other currencies where valuations are being reduced in an effort to help fuel growth, whereas the Federal Reserve has completed its accommodative monetary policies. Additionally, deleveraging is playing a role – debts being paid off leads to fewer dollars in the system, thereby increasing the value of those dollars.
I have written about exchange-traded fund (ETF) PowerShares DB U.S. Dollar Bullish ETF (UUP) as a potential investment since late 2014. However, you likely only would have made between 4% and 5%. Most fixed-income minded investors would be happy with this kind of return, but not the majority of investors. Then again, given the way equity markets have been behaving recently it’s very possible that scores of investors would be happy with a 4%-5% gain year-to-date (YTD). (For more, see: ETF Analysis: PowerShares DB US Dollar.)
What’s done is done. All we can do now is look at some potential ideas for the future.
U.S. Dollar Impact
A strong U.S. dollar is bad for large-cap multinationals because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, then it could also have a negative long-term impact because those overseas consumers will begin to turn away from American brands. The most likely scenario is that the U.S. dollar continues to appreciate for the next 1-3 years as central banks around the world continue to print money in a fruitless effort to help fuel growth in their local economies while a massive delivering takes place in the United States. After that, the U.S. dollar strength should begin to wane, but that’s a long time from now so it’s not something to focus on for current investment ideas. (For more, see: 3 Factors that Drive the U.S. Dollar.)
The sectors most hit by a strong dollar are technology, energy and basic materials, but the large-cap names that will potentially see their earnings hit go well beyond these three sectors. And in those sectors, your research should be done on a case-by-case basis. Some of the names that have been negatively impacted or might be negatively impacted by a strong U.S. dollar: (For more, see: How a Strong Greenback Affects the Economy.)
General Motors Co. (GM)
3M Company (MMM)
Procter & Gamble Co. (PG)
Estée Lauder Companies Inc. (EL)
International Business Machines Corp. (IBM)
Chevron Corp. (CVX)
E. I. du Pont de Nemours and Co. (DD)
United Technologies Corp. (UTX)
Accenture plc (ACN)
Oracle Corp. (ORCL)
Domestic Strength
On the other end of the spectrum, domestic companies will not be negatively impacted by the U.S. dollar. However, you still need to use caution. The domestic economy is often advertised as strong, but this is primarily based on the labor market. If you want to know the truth about the labor market, look at the labor force participation rate, not just the unemployment number. There's a reason the Federal Reserve has kept interest rates at record lows for six years. (For more, see: The True Unemployment Rate: U6 vs. U3.)
Due to a lack of wage growth and sustainable consumer spending, some of the names below should only be seen as potentially better options than the names above on a relative basis. The truth is that the vast majority of stocks will have a difficult time seeing appreciation over the next year. However, if you would like to be long without having to worry about a U.S. dollar impact, here are some names to research further:
Alaska Air Group, Inc. (ALK)
Dollar General Corp. (DG)
The TJX Companies, Inc. (TJX)
CVS Health Corp. (CVS)
The Allstate Corp. (ALL)
UnitedHealth Group Inc. (UNH)
The Bottom Line
If you’re concerned about the impact of the U.S. dollar on your investments, then consider staying away from multinationals and looking into companies that only have domestic exposure. That said, while these stocks should perform better on a relative basis, you still might want to curb any high expectations for the near future.
