The U.S. dollar has been extremely strong recently due to global economic weakness. The U.S. economy’s growth is nothing special compared to the country’s historic economic growth rate, but weakness and instability in Europe and other major economies has boosted the dollar’s strength.
What Does A Strong Dollar Mean For Investors?
The strong dollar is bittersweet for equity investors. A strong dollar caps inflation, which means imports are cheaper and prices are cheaper for U.S. consumers.
However, with U.S. goods and services becoming more expensive relative to the rest of the world, American companies that rely heavily on foreign profits can suffer during times of a strong dollar.
Low Inflation
American consumers and businesses pay less for imports and commodities during times the dollar is strong. For example, the price of oil has plummeted more than 50 percent over the past year, and that has greatly reduced energy expenses for many large American companies.
With more money in the pockets of American consumers, a strong dollar usually brings about a rise in discretionary spending.
Companies that depend on discretionary spending can see rising profits from a strong dollar.
Stocks To Play A Strong Dollar
Typically during times of dollar strength, companies that earn a high percentage of revenue from domestic sources will do best and companies that rely on foreign revenue will suffer.
For example, Apple Inc. AAPL 0.21%, International Business Machines Corp IBM 1.05%, Chevron Corp CVX 1.89% and The Proctor & Gamble Co PG 1.22% all derive more than 60 percent of their sales from international sources and will likely see dollar-related headwinds.
Companies that derive a majority of their income domestically could see a relative boost in business.
These companies include American banks such as Bank of America BAC 0.55% and PNC Financial Services Group Inc PNC 0.34%, retailers such as The TJX Companies Inc TJX 0.22% and Ross Stores Inc ROST 0.23%, and companies that rely on discretionary spending such as AMC Entertainment Holdings Inc AMC 3.05% and the Cheesecake Factory Inc CAKE 0.84%.
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