Stronger Dollar and the Stock Market

Includes: IVV, SPY, UDN, UUP
by: Bespoke Investment Group

Given the dollar's recent strength, there has been some concern that exports, the one bright spot still underpinning the economy, will get hurt.  While a stronger dollar certainly makes US goods less attractive relative to foreign products, you would need to see a much bigger and longer rally in the dollar before the positive benefits start to reverse themselves.  Additionally, while exports would get hurt, the US imports more than its exports, therefore on a net basis the portion of the economy that benefits is greater than the portion that gets hurt. 

A look at the historical record also shows that a strong dollar is much better for stocks than a weak one.  Below, we highlight a chart from prior reports we have sent out to Bespoke Premium subscribers.  Since rallies and declines in the dollar are typically measured in years rather than weeks or months, the S&P 500 has averaged positive returns during both dollar bull and bear markets. 

However, equity gains during dollar bull markets (20% rally preceded by a 20% decline) are much greater than dollar bears (20% decline preceded by a 20% rally).  As shown, the average return of the S&P 500 during dollar bull markets is over 80%.  During dollar declines, the average return is less than 20%.

click to enlarge