Should Equity Investors Fear King Dollar

With two weeks left in 2015, the S&P 500 Index is flirting with its first down year since 2008. Much of the blame for its inability to push higher has been placed on the strength in the U.S. Dollar, which has appreciated against nearly every other global currency.

The argument goes follows: a strong Dollar has been a headwind for U.S. exports, the economy, earnings, and revenues. In a world of slowing growth, currency debasement has increasingly become the economic weapon of choice. The “winners” of this currency war are said to be those countries who can debase their currency at the fastest pace.

I reject the notion that you can debase your way to prosperity, but this seems to be accepted as an absolute truth these days, especially within the ivory central bank towers.

Regardless of whether you believe that debasement is good or bad for long-term economic growth, is this something investors should be focusing on? Stated differently – should U.S. equity investors really be hoping for a weaker Dollar in the months and years to come?

Based on the historical evidence, the answer is far from clear.

We have full-year data on the Dollar Index (Bloomberg Ticker: DXY Index) going back to 1968. On a calendar year basis, the correlation between the return of the Dollar Index and the return of the S&P 500 has been essentially zero (.04).


The S&P 500 has experienced its highest return years with both a weaker Dollar (1985, 1995) and stronger Dollar (1975, 1980) with no predictive pattern. Similarly, it has experienced its worst down years with both a weaker Dollar (1974, 2002) and stronger Dollar (2001, 2008).

The chart below displays the rolling 1-year correlation between the Dollar Index and the S&P 500 using monthly returns. As you can see, there is little in the way of consistency over time.


In the current economic expansion (June 2009 – Today), however, the correlation has been more persistently negative than in prior cycles. Perhaps this can be attributed to the heightened focus on easy money central bank policies and debasement (along with weaker economic data) being viewed as a “positive” for markets. Or perhaps it is spurious, we’ll never know.

What we do know is that predicting where the Dollar is going to be a year from now is essentially a coin flip (Dollar Index has been up 51% of the time since 1968) and that even if you had such a prescient ability you couldn’t say with any certainty what effect it would have on stock prices.


Because a stronger Dollar due to stronger economic growth (and earnings) can be a very good thing for stocks. However, a stronger Dollar due to a tightening of monetary policy can be a headwind for stocks. Meanwhile, a weaker Dollar due to weaker economic growth can be bad for stocks while a weaker dollar due to a loosening of monetary policy is generally viewed as positive.

With the Fed set to hike rates for the first time since 2006 and other central banks still easing, most are now convinced the Dollar will continue to rise in 2016. They may be right, but will it be due to tightening of U.S. monetary policy, further easing by the ECB/BOJ, stronger U.S. economic growth, or some combination thereof?

Confused yet? You should be. Which is why there are better things for long-term investors to worry about than predicting the direction of the Dollar.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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