Even as increased liquidity in Europe and the United States has boosted investors' outlook, sending stocks to four-year highs, the U.S. dollar has suffered. All the sectors of the S&P 500 have become much more sensitive to fluctuations in the value of the dollar over the last three years, but by looking at correlations, investors can see which sectors are most likely to benefit, according to Sam Stovall, chief equity strategist at S&P Capital IQ.
In the past 20 years, the correlation between stocks and the dollar has been negative, but only slightly so. Generally, the market is buffeted by a variety of factors, including investor confidence, earnings projections, energy prices and so on. Stocks are not generally dominated by one factor. "Yet recently, what we've found is the dollar has played a significant role in the direction of U.S. equities," said Stovall. "It signals risk on or risk off from a global perspective." He said when the dollar strengthens, it means investors are fearful of macro events and hide out in the safest currency on the globe: the U.S. dollar. When the dollar weakens, the all-clear signal has been given that it's safe to swim in riskier waters like the stock market.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access