Posted by: Ben Steverman on May 12, 2010
Since Nov. 25, the euro has lost 16.3% of its value against the U.S. dollar. Since just Apr. 14, the euro has dropped 7.2%.
While talking to strategists and portfolio managers, I’m detecting growing concern among U.S. stock investors about the strong dollar.
The problem is two-fold: First the impact on the U.S. economy and second the effect on reported corporate earnings.
Bruce Bittles, Robert W. Baird’s chief investment strategist told me the strong dollar “will be a headwind for earnings and perhaps the economy as it cuts into exports.”
A weak dollar makes U.S. overseas exports more competitive, while a stronger dollar could hurt exports. For example, if the dollar is weak, sales of Caterpillar (CAT) construction equipment in Germany will net the company more in dollars when those euros are brought back home.
During the greenback’s consistent downtrend from 2002 to 2008, the weakening dollar again and again boosted year-over-year comparisons of overseas cash flow and earnings for companies like Caterpillar. The dollar bounced around wildly in late 2008 and 2009, but now many worry the dollar has strengthened for good, as much of the developed world lags the U.S. in its economic recovery.
U.S. large-cap companies get a big share of their revenue from overseas. Not all companies actually disclose how much of their sales come from abroad, but Morgan Stanley estimated in March that the S&P 500 receives 31% of its revenue from outside the U.S.
Smaller U.S. companies are less exposed to foreign markets. Maybe that’s one reason why the small-cap Russell 2000 is up 3.2% since the beginning of April, while the large-cap S&P 500 is down 1.1%.