Here’s what a strong US dollar means for your stocks

Key points

  • The US dollar index is up 17% this year, hitting 20-year highs
  • Netflix stock is down (-60%) against the falling Nasdaq index (-33%). Netflix gets 60% if its overseas sales
  • Humana stock rose 4% for the year, as it derives 90% of its revenue from US state and federal health benefit programs.

Headlines highlighting the strength of the US dollar are becoming commonplace these days. A strong U.S. dollar may be good for U.S. citizens who buy foreign goods as their purchasing power increases, but it is detrimental for foreign buyers and the U.S. businesses that sell to them. When the U.S. dollar is strong, international buyers have to pay more of their currency for the same U.S. goods and services, leading to lower demand or the search for alternative sellers. A combination of a strong US dollar and rising inflation is a gut punch to demand for US goods and services from foreign buyers. A strong US dollar also tends to lead to a weak stock market, as they also move inversely. Keep in mind that the strength or weakness of a currency is based on its comparison with another currency. The US Dollar Index measures the dollar against a basket of other currencies and is up 17% for the year compared to (-25%) for the S&P 500 and (-33%) for the Nasdaq.

What causes a strong US dollar?

When the United States has relatively the strongest economy with the least geopolitical risks compared to other countries, global investors move money into the US dollar. By selling their currency to buy US dollars, they weaken their currency and strengthen the dollar. The euro suffered from geopolitical tensions stemming from the war in Ukraine. The pound fell off a cliff to a record low as its self-inflicted financial crisis prompted a misguided fiscal stimulus package meant to revive the economy but could backfire and fuel further inflation .

The Fed exacerbates

The strength of the US dollar is also fueled by interest rate hikes by the US Federal Reserve (Fed). The US dollar has nearly outperformed all other asset classes this year. Until a few months ago, markets didn’t really care about the impact of the strong US dollar on earnings since volatility was priced in with constant exchange rate metrics. Constant currency refers to the use of a fixed exchange rate that eliminates volatility and fluctuation when reporting financial performance. Frankly, the markets passed on companies that reported weaker earnings due to currency volatility.

No more room passes

However, all that changed when the markets realized that the temporary nature of the exchange rate fluctuation had turned into a deadly grind with no respite in sight as the US dollar index hit 20-year highs. The US dollar hit its highest level in 37 years against the British pound last week. As more companies miss earnings estimates due to the strong US dollar, stocks are being punished, sending markets even lower as the contagion spreads and grows. Evidenced by the strong sell-off in shares of cloud database giant Oracle (NASDAQ:ORCL). The company posted impressive earnings as it saw its cloud revenue jump 45% year-over-year (YoY) to $3.6 billion or 50% in constant currency. However, Oracle missed its Q1 2022 EPS estimates of (-$0.04) and guided Q2 2022 EPS lower as the strong US dollar hurt its business in the US. foreign. Shares started the day up 2% the next day at $79.41 as they fully reversed surrendering all the gains and continuing to sell for the next two weeks to hit a low of 61.07 $. Sports footwear and apparel maker Nike (NYSE: NKE) expects gross margins to shrink 350-400 basis points on currency volatility, with its stock tumbling (-12, 8%) after the publication of its profits. Adobe (NASDAQ:ADBE) saw its shares tumble and surge as its business takes a hit (-2%) to (-3%) from the strong US dollar in addition to overpaying 50X sales for its acquisition of Figma. While Salesforce (NYSE: CRM) is still doing gangbuster business, the strong dollar will cost them more than $800 million this year.

The winners

Globalization was the goal of companies seeking to grow. However, a strong US dollar punishes them. For investors, it is important to know the composition of the domestic and foreign revenues of their companies. Companies that do most or all of their business in the United States should perform better than multinationals. Healthcare companies like Humana (NYSE:HUM) derive all of their revenue from the United States, with more than 90% of their revenue coming from federal and state health benefit programs. This is why stocks are up 4% against a decline (-25%) for the S&P 500.

Losers

US importers benefit from a strong US dollar, but US exporters of goods and services are hurt by a strong US dollar. As the U.S. stock market has fallen this year, companies with a large portion of their revenue coming from overseas are being hit even harder than benchmarks. For example, shares of video streaming giant Netflix (NASDAQ: NFLX) are down (-60.5%) against the falling Nasdaq index (-33%) for 2022. Netflix pulls nearly 60% of its income from abroad. Companies in emerging economies are being hit twice in the gut as servicing US dollar-denominated debt becomes more expensive, as do commodities priced in US dollars.

Companies mentioned in this article

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