Strength of the U.S. Dollar and the Stock Market

Chart of the Week: Does Following the Dollar Make Sense?

With the U.S. dollar trading around a 20-year high, it’s no wonder the greenback is in the news. Will the dollar continue to strengthen or is it set up for a fall?

I don’t have a crystal ball. But it isn’t an idle question for investors trying to figure out when foreign stocks will outperform U.S. stocks again.

Over the past 25 years or so, we’ve seen multiyear cycles of U.S. stocks beating foreign stocks and vice versa. Those cycles of relative performance have coincided with periods when the dollar’s been strengthening (good for U.S. stocks) and weakening (good for foreign stocks). So, if you can get the dollar “right,” you have a good shot at getting the U.S. or foreign stock question correct.

Unfortunately, timing the currency market isn’t any easier than timing the stock market. That’s why we prefer to stay diversified—owning both U.S. and foreign stocks in our portfolios. That way we stand to benefit whichever way the currency (and stock market) winds blow.

Does Following the Dollar Make Sense?
Note: Chart shows the change in index level (rescaled to start at 100) for the Trade Weighted U.S. Dollar Index (4/30/1996 through 1/31/2006) and the Nominal Broad U.S. Dollar Index (1/31/2006 through 5/31/2022) along with the relative performance for hypothetical investments in Vanguard U.S. Total Stock Market Index and Vanguard Total International Stock Index (when the dashed line is rising, the U.S. fund is outperforming the international fund) from 4/30/1996 through 5/31/2022. Sources: Federal Reserve Bank of St. Louis, The Vanguard Group, Adviser Investments.

This material is distributed for informational purposes only. The ideas and opinions contained herein  should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2022 Adviser Investments, LLC. All Rights Reserved.

Tags:

Chart of the WeekcurrencyJeff DeMasoU.S. dollar

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.