“ We hardly ever hear about companies whose bottom lines have been helped by foreign currency fluctuations. ”
Don’t believe the commentators who argue that the U.S. dollar’s strength is bad for U.S. corporations. While the dollar’s fluctuations on the foreign exchange market are undeniably significant in many other ways, they are not correlated with changes in market-wide corporate profits. So for every company that is hurt by a stronger dollar, another is helped — and vice versa. The net effect is undetectable.
Yet we hardly ever hear about companies whose bottom lines have been helped by foreign currency fluctuations. Their good fortunes invariably are attributed to the brilliant execution of their business plans. We instead only hear from companies that complain about how the dollar is hurting earnings, regardless of whether the dollar is rising or falling.
Take the third quarter of 2022, during which the U.S. Dollar Index
DXY
enjoyed its strongest quarter since 2016, rising more than 7%. In the earnings season for that quarter, according to FactSet, 50% of S&P 500 firms
SPX
argued in their earnings calls that the stronger dollar had a negative impact.
In the following quarter the dollar reversed course in a big way, giving up all its third-quarter gains and then some. You might therefore have expected that the 50% of firms that previously were complaining would now be thanking their lucky stars. But their silence was deafening, and instead we only heard complaints that the dollar was having a negative impact.
Clearly, we’re not going to obtain an objective analysis of the dollar’s impact by following comments in earnings calls.
A more objective analysis comes from measuring the correlation between quarterly and yearly changes in the DXY and the S&P 500’s earnings-per-share. Based on quarterly data since 1985, the correlations are so weak as to not satisfy standard levels of statistical significance. I reached the same conclusion when analyzing correlations between the dollar and the S&P 500 itself.
The lack of any statistically detectable correlations hasn’t stopped many commentators from bemoaning the recently strong dollar, however. A recent and typical headline blared: “The Unstoppable Dollar Is Bad for the S&P 500.” Investors and their advisers should respond: Show me the data.
The last time I wrote about the dollar, making many of the same points I’m stressing now, the dollar was coming off its worst quarter since 2010. Many of you at that time weren’t inclined to share my cynicism, but now maybe you’ll reconsider. Many of the analysts who were then bemoaning the weak dollar are the same ones who are now blaming the strong dollar.
The dollar may be a convenient whipping boy, but the blame game is hardly a profitable investment strategy.
Questions to ask during earnings season
Financial analysts should ask tough questions of a CEO if during the company’s earnings call the U.S. dollar gets blamed for causing a disappointing quarter.
Perhaps the first question to ask is whether the CEO’s company is in the business of foreign exchange trading. If the answer is yes, then your follow-up question should be why management believes it is able to time the dollar’s fluctuations. Based on my more than 40 years of tracking market timers’ performance, I know of no timer who has done so consistently and successfully.
If the CEO instead says that the company is not in the business of foreign exchange trading, then your line of follow-up questions should take a different tack: Why didn’t the company hedge its foreign exchange exposure? Wide fluctuations in the dollar’s value are to be expected, and companies presumably closely track their foreign currency exposure. To the extent they hedged that exposure, there would be no basis for blaming the dollar for any impact on a company’s bottom line.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
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