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What Does a Strong Dollar Mean for Stock Prices?

By Dr. Steve Sjuggerud
Tuesday, March 31, 2015

Up, up, up...
It has been a one-way move for the U.S. dollar over the past year. The "buck" is up an astounding 20% in just 12 months.
If you listen to the financial news, you might think the dollar's big move could be devastating for the stock market. A strong dollar is going to kill U.S. exports... thus crushing company earnings... thus causing a stock market selloff.
But is any of that true?
How does a strong dollar really affect the stock market going forward?
In short, a big 12-month move in the dollar is actually a good thing for stocks.
Let me show you a couple reasons why...
First, a 20%, one-year gain is one of the largest we've ever seen in the U.S. dollar. So let's look at previous extreme year-over-year moves in the dollar.
Based on history, the dollar has increased 10%-plus over 12 months only 14% of the time since 1971.
On average, stocks did NOT fall over the next year, as the financial news would have you believe.
Instead, the stock market increased by 10% a year after the dollar had those massive moves.
Since 1971, the typical one-year move in stocks was 7.2%. So stocks actually outperform a year after the dollar has soared. We could actually see stocks outperform over the next 12 months thanks to an incredibly strong dollar.
To make sure, let's think of it another way. Consider...
What happens to stocks when the dollar trends higher, and what happens when it trends lower?
The answer is: not much. Take a look...
S&P 500 Annual Return
All Periods
Dollar Uptrend
Dollar Downtrend

The long-term return in stocks has been 7.2% a year. (This data goes back to 1971, like before.) When the dollar trends higher, stocks move up at a slightly slower rate. And when the dollar falls, they move higher at a slightly quicker rate.
Sure, the overall stock return varies slightly based on what's happening with the dollar. But in total, the dollar's strength or weakness actually has little effect on stocks.
In short, if you're worried about the strong dollar hurting stocks, please stop.
History shows the dollar has little effect on U.S. stocks. And the market can actually outperform after the dollar does well (like today).
Good investing,

Further Reading:

Steve also thinks the effect rising rates will have on stocks has been overstated. "Let the talking heads on TV worry about the effects of a rate hike by the Federal Reserve," he writes. "But don't you worry about it. It won't end this bull market." Find out why right here.
And that's if rates rise at all... Steve thinks they'll stay low for longer than most folks realize. "The 'King of Bonds' expects interest rates to continue lower," he writes. "And I agree with him." Get the full story here.

Market Notes


It's a bull market in home builders... and DailyWealth readers shouldn't be surprised.
For years, DailyWealth has urged readers to get long real estate in one form or another. Steve has published many essays urging people to buy real estate. He has recommended shares of investment firm Blackstone, which is heavily involved in real estate (shares have soared).
Today's chart shows another real estate play that is trending higher. It shows the past four years' trading of the iShares U.S. Home Construction Fund (ITB) – a one-click way to own a basket of home-building stocks.
The ITB fund enjoyed a huge rally from late 2011 to mid-2013. It then digested that gain and traded sideways for more than a year. But just recently, shares broke out to a new high. The real estate rally is still going.

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