If the Buck Stops Here

Executive Summary

  • After several years of strengthening, the dollar began drifting lower in late September and has continued to weaken.
  • Sector leadership has changed.
  • Should this trend continue, some cyclical areas of the market would likely benefit.

After jumping 7% during the first quarter of the year, the dollar has drifted sideways as illustrated, and has shown signs of softness in the past few weeks. It’s too soon to tell if the weakness marks the beginning of a long-term trend; however, it has provided a glimpse of a possible landscape investors haven’t seen in seven years.

Since hitting a six-week peak on September 23, the dollar is down 2% as measured against a basket of major currencies. During the same period, the market has seen a change in sector leadership. “Out” are domestic focused industries that are less tied to economic growth. Cyclical areas with overseas exposure are “in.” Energy in the Russell 2000® Index has had a solid move up, and Materials is showing strength. Consumer Staples are flat. Health Care stocks have sold off.

While Materials and Energy could be expected to benefit from a depreciating dollar, we think there will be other opportunities. Information Technology has significant overseas exposure and could reap rewards when sales abroad are translated back into a weaker currency. Industrials stand to capitalize on its sales in international markets and its strong ties to Energy.

A look at historical data supports our thinking. While many factors determine the performance of a stock or sector, we analyzed data taken from the last sustained cycle of dollar erosion. After accounting for the effect of movements in the market on individual sectors, we found that in addition to Energy and Materials, Information Technology was an outsized beneficiary of a soft dollar as were Industrial names. A weak dollar hurt Financials and Consumer Discretionary.

The upshot for value investors is that stocks in these sectors already represent upside opportunity based on pricing multiples and could get an additional boost from the direction of the dollar.


Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Foreign investing involves special risks such as currency fluctuations and political uncertainty.

Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Sector and Industry classifications as determined by Heartland Advisors may reference data from sources such as FactSet Research Systems, Inc. or the Global Industry Classification Codes (GICS) developed by Standard & Poor’s and Morgan Stanley Capital International.

Definitions: Cyclical Stocks: cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Bloomberg Dollar Index Spot Index: has a base value of 100 as of 12/31/2004 and tracks the performance of the U.S. Dollar against a basket of 10 leading global currencies. Each currency in the basket and their weight is determined annually based on their share of international trade and foreign exchange liquidity. All indices are unmanaged. It is not possible to invest directly in an index.

CFA is a trademark owned by the CFA Institute.

©2015 Heartland Advisors heartlandadvisors.com


© Heartland Advisors

Read more commentaries by Heartland Advisors