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Weekly eLetter 2/15/2019 – US Dollar Impact on Different Asset Classes

Since 1985, the US Dollar has spent alternating periods, each of similar duration, rising and falling in value, with each stint lasting 516 days on average. During those periods some assets have shown strong performance tendencies in rising dollar environments, while others have fared better in falling dollar environments. By paying attention to the changing strength of the US Dollar, we can have a reasonable idea of which assets are likely to be better holdings for our portfolios.

Rising Dollar Assets:

  1. US Equities tend to outperform non-US Equities when $ is strong
  2. Small and Midcap Stocks – Outperform Large Caps in strong $ markets
  3. Growth Stocks – consistently better than Value stocks when $ is strong

Falling Dollar Assets:

  1. Non-US Equities – Positive absolute returns when dollar is falling
  2. Commodities – Positive returns when dollar is falling
  3. Gold – Positive returns when $ is falling

International Currencies – Greater positive returns when the $ is falling.

Note that the dotted green line – the 50-day moving average — is above the red line, which is the 200 day moving average. Also note that the 200-day moving average — which tells us the trend of the US Dollar — is up.  SO… We can look at the Rising Dollar Assets section above, and we’ll note that US equities, Small and Midcap stocks, and Growth Stocks are expected (based on history) to do better than the Falling Dollar Assets – such as Non-US Equities, Commodities, Gold, and International Currencies. And that is (mostly) what is actually happening. Gold seems to be recently going its own way, but the rest of the generalizations are holding true. Mid-caps are the strongest area of the US Markets, and Growth Stocks are out-performing Value Stocks. Non-US stocks and Commodities are mostly under-performing.

Keep these generalizations in mind, and when you hear the financial commentators mention that the US Dollar is weak or strong, you’ll likely have a reasonable idea which assets you want to hold in your portfolios.

– Read more …