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Will the Rising Dollar Impact Earnings?

Several times during the past several weeks rhetorically asked how the rising dollar will impact results, conjecturally answering if history is of any precedence, negatively.  Yesterday this conjectural question and rhetorical answer became reality.  The rising dollar has impacted earnings, an impact that I don’t think will be short lived.

As noted many times approximately 48% of the S & P 500 revenues and 52% of the S & P 500 profits are derived from trade.  Equities are typically valued by corporate cash flows discounted by some interest rate.  Unfortunately the rising dollar has negatively impacted corporate cashflows.

In my view it is unlikely the strengthening dollar will weaken anytime soon given the massive QE program Europe has just embarked upon.  The Japanese version of QE cheapened the Yen and it appears the lower Yen is now positively impacting its economy via cheaper exports and more expensive imports.

Speaking of interest rates, today is the conclusion of the two day FOMC meeting.  No change is expected but all will scrutinize all statements in an attempt to discern a monetary time table.

As also noted a gazillion times, the S & P 500 historically declines between 7% and 10% when monetary policy is tightened.  History then states in the seven tightening moves since 1971, the S & P is about 11% higher twenty one months following its first interest rate hike.

What will happen today following yesterday earning inspired drop?

Last night the foreign markets were mixed.  London was down 0.13%, Paris down 0.57% and Frankfurt down 0.09%.  Japan was up 0.15% and Hang Sang up 0.22%.

The Dow should open quietly higher even as NASDAQ futures are considerably higher because of Apple’s strong results.  The crushing of the Greek markets continued as the new government took power and Russia failed in a bond offering which may a precursor of a liquidity crunch.  The 10-year is  up 4/32 to yield 1.81%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.