The Dollar's Impact On Sectors And The Overall Market

Eddy Elfenbein submits: The U.S. dollar has been in freefall lately, but it seems to have little or no impact on the stock market’s rally. In fact, it seems to be helping.

I decided to do a little analysis and see how much the exchange rate, the dollar/euro in particular, impacts equity prices.

From the beginning of 1999 to the end of June, the euro and the stock market were traded on about 2100 days. On days when the euro rose against the dollar, the S&P 500 lost a combined 66%. Annualized, that works out to a loss of -22.88% a year. When the euro fell against the dollar, the S&P 500 gained an annualized 35.30%.

Here are the annualized rates for the S&P 500 sector groups:

.................................Euro Up....................Euro Down
Energy......................9.28%.......................17.58%
Discretionary............-28.57%.......................47.76%
Staples......................-5.07%.......................8.21%
Financials..................-27.26.......................51.23%
Healthcare.................-12.84%.......................17.39%
Industrials.................-21.50%.......................40.90%
Tech.........................-44.04%.......................69.80%
Materials.....................0.32%.......................16.17%
Telecom...................-24.73%.......................19.24%
Utilities......................-2.40%.......................7.43%

Editor: Movements in the Dollar-Euro exchange rate are investable via the CurrencyShares Euro Trust (FXE) and iPath EUR/USD Exchange Rate ETN (ERO). See the full listing of Currency ETFs and ETNs. Sector performance using Mr Elfenbein's classification is actionable via the following ETFs:

• Vanguard Consumer Discretionary ETF (VCR)
• Vanguard Consumer Staples ETF (VDC)
• Vanguard Energy ETF (VDE)
• Vanguard Financials ETF (VFH)
• Vanguard Health Care ETF (VHT)
• Vanguard Industrials ETF (VIS)
• Vanguard Information Technology ETF (VGT)
• Vanguard Materials ETF (VAW)
• Vanguard Telecommunciation Services ETF (VOX)
• Vanguard Utilities ETF (VPU)

See the full listing of Primary US Sector ETFs.

Comments

[Rajiv Kumar:]

Did u try with weekly changes? (weekly EUR/USD change vs stock market gains). 1D changes will have a lot of noise in my opinion.

2007 Jul 18 02:01 AM

[Frank Li:]

Fascinating article -- thank you Eddy. (I immediately went to your blog to check it out.)

I understand why consumer discretionary should be so leveraged to the ER -- a falling dollar implies a need for higher rates, which hits consumer discretionary spending particularly hard.

But why tech? An increasing proportion of tech is exported, and the interest rate leverage on tech investment can't be THAT great.

2007 Jul 18 08:44 AM

[Ralph F:]

Makes sense that the defensive sectors such as healthcare, utilities, materials, and staples weren't down much. Not sure what to make of the big hit to telecom though.

2007 Jul 18 09:03 AM