Many companies try to attribute their low profits to the US dollar. Don’t believe it.

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By Marc Hubert

Using currency fluctuation to time the stock market is a losing bet

The US dollar has become an all-too-convenient scapegoat for S&P 500 companies trying to explain why their earnings fell short. You should take these explanations with a healthy grain of salt.

The US dollar index has fallen in recent months. Still, whether the index was up or down, companies complained. In October 2022, for example, companies reported on the profits they made when the dollar soared.

At that time, FactSet reported that 50% of S&P 500 companies cited a “negative impact” from currency. Today, at the start of the current earnings season, FactSet reports that 55% of S&P 500 companies cite a negative currency impact.

This is not to say that currency fluctuations will never affect a company’s bottom line. But for every business affected by such fluctuations, another is helped. But you never hear of these companies. Instead, better-than-expected earnings are invariably attributed to excellent execution of a brilliant business strategy. Shortfalls, on the contrary, are attributed to events beyond a company’s control, such as fluctuations in the US dollar.

To paint a more objective picture of the dollar’s impact on corporate earnings, I looked for correlations between quarterly changes in DXY and S&P 500 EPS since the early 1980s, four decades ago. I came up empty, at standard levels of statistical significance.

One of the most interesting trends that has emerged is the wide variability in the relationship between the US dollar and corporate earnings. There have been times over the past four decades when their five-year correlation was positive and times when it was negative. Knowing this does not help you to make money in the stock market, because first you need to know if we are in a period where the correlation is positive or negative.

Admittedly, my simple statistical test will not detect all of the complex interrelationships between the various factors that affect both the dollar and earnings. However, I tested several different econometric models that included as variables not only income and the dollar, but also inflation and interest rates. The dollar also did not have a statistically significant relationship with income in these more complex models.

This does not mean that dollar fluctuations are irrelevant to an equity investor. But my results suggest that there is no direct causal relationship between the dollar and corporate earnings that leads to a simple mechanical rule for using the US dollar to time the US stock market.

International Mutual Funds

Note that this discussion has nothing to do with the investment performance of international mutual funds. When the US dollar declines against foreign currencies, a dollar-denominated investor in these funds enjoys improved performance – capturing both the investment returns of the funds themselves and also the foreign currency returns against to the dollar.

This improvement in performance has been fully visible since the start of the fourth quarter of last year, when the DXY hit a two-decade high. Since then, the dollar-denominated performance of global stock markets outside of the US has beaten the US stock market, as evidenced by the returns of the iShares MSCI ACWI ex-US (ACWX) ETF versus the Vanguard ETF. Total Stock Market (VTI)VTI ].

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]

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-Marc Hubert

(END) Dow Jones Newswire

02-02-23 1657ET

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