Money managers and TV analysts on business channels are fretting over the impact of a strong dollar on earnings and therefore the stock market. However, a strong dollar is a vote of confidence for the US economy and should be viewed as such, with a longer term benefit to equity markets.
Why Is The US Dollar Strengthening In The First Place?
Nothing is as simple as it seems, or is it? Economies outside of the US are struggling and on a relative basis, the US economy is doing well. The US economy is not going gangbusters but the Fed is on the doorstep of tightening, whereas the rest of the world's central banks are in the midst of loosening policies. With other advanced economies like Japan and the Eurozone lowering interest rates and, as a result, devaluing their currencies, the dollar is strengthening by default. With the US dollar ostensibly acting as the world's currency, the US dollar cannot weaken itself against itself while other currencies can devalue themselves against it. As long as the US economy outperforms on a relative basis, the US dollar should continue to strengthen.
A Strong US Dollar is Good For The US Economy
Despite the consternation of myopic money managers and analysts, a longer term perspective of the economy is more favorable with a strong US dollar. It signifies a strong US economy which will ultimately feed the "virtuous cycle" the economy needs to grow and expand. A stronger economy means healthier companies, creating more jobs for consumers, who will ultimately benefit from a stronger currency in their pockets when they go to make purchases of all kinds. It means the paychecks they receive will go further, particularly considering the commodities that are part of the cost structure they live under, will be cheaper. For example, the consumers' stronger dollar means cheaper oil which equates to cheaper gas at the pump, leaving more discretionary income for these same consumers.
Whither Multinationals?
The primary debate revolves around the performance of large multinational corporations that make up the S&P 500 and the Dow Industrials. As the theory goes, a strengthening US dollar will make the products of US based multinationals too expensive for non-US consumers as those currencies weaken against the US dollar. As those products get more "expensive" abroad it will dent the demand and ultimately hit the bottom line of the large multinationals. This is not necessarily the case as these companies make the end product overseas and price them in the fiat currency of the host nations. To the extent that US multinationals are using the strong dollar to keep costs down, weaker sales should be mitigated accordingly.
Even Better For Domestic Companies
For companies that sell most of the their products and services domestically, a stronger US dollar is a boon. This narrative feeds right in to the "virtuous cycle" theory. A cheaper cost structure combined with a healthier consumer means improved margins and better sales.
History Is On Our Side
Historically, the greatest periods of prosperity in the US have been accompanied by a similarly strong US dollar. Strong global economies do not have weak currencies. Runaway inflation has never been associated with a healthy economy. Argentina is a good case study of a weak economy with runaway inflation. During times of financial crisis, foreign currencies will flow to the US dollar causing it to strengthen.
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