An Unanticipated Victim To The Strengthening Dollar

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  • The strong dollar has been a headwind for blue chip US companies .
  • A surging greenback eats into the international profits of companies like Apple, Procter & Gamble, McDonald’s and Coca-Cola.
  • Smaller US companies, which tend to have a more domestic focus, have not held up better during this time of dollar strength.

The S&P SmallCap 600 index has plunged 22% this year, only slightly less than the S&P 500’s 25% drop. And the Russell 2000, another index of mostly smaller companies, is down 25%, too.

Cause and Effect

That’s unexpected given the profile of small cap companies. “Small cap equities are…more US centric in their revenue exposure and less likely to be hurt by a stronger US dollar than large multinationals,” said Jim Besaw, chief investment officer of GenTrust. The problem is that investors are worried about a looming economic slowdown in the US, so any benefit from a stronger dollar  i.e. less exposure to the global economy — is being offset by recession worries domestically.

However, the Federal Reserve won’t be aggressively hiking rates forever. The market is starting to price in the possibility of some small rate cuts at the end of 2023. Meanwhile, some experts think there are parts of the US market where investors can hide, even among larger companies.

Nothing is totally immune to the effects of a strong dollar. Sure, some sectors may not be hit as badly as others. And multinational companies and foreign stocks will fare more poorly than smaller companies with little to no international exposure. But as long as the Fed continues to raise rates, the dollar is unlikely to weaken significantly. That will continue to be a problem for American consumers and investors.

The UK Conundrum

The new finance minister in the United Kingdom is already reversing what was meant to be a signature economic plan of British prime minister Liz Truss. Jeremy Hunt said he is undoing “almost all” of the major tax cuts that Truss’s previous financial chief, Kwasi Kwarteng, had put into place. 

Even US President Joe Biden was skeptical of the UK’s trickle-down proposal, calling the idea of big cuts, geared particularly for the benefit of wealthier individuals and businesses, a “mistake.” The UK government is promising to keep subsidies in place through April 2023 to help cap how much consumers pay for energy as costs have risen to exorbitantly high levels.

All Eyes On Xi

Chinese leader Xi Jinping is expected to soon secure an unprecedented third term as head of the Communist Party. As CNN Business’ Laura He notes, Xi now faces many big challenges ahead to get the Chinese economy back on track. China’s stringent zero-Covid policy has not stopped the pandemic from hurting growth. Youth unemployment is skyrocketing, and the lockdowns due to Covid have also led to more social unrest. All the while, China’s housing market is in the midst of a meltdown. And there are growing concerns about how China’s continued crackdown on large companies and wealthy individuals could hamper the economy even further.

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Source: EditionCNN

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