Contrary to expectations, the dollar has staged a strong rally in recent days. If history is any guide, a rising greenback will also have implications for U.S. share prices.
According to Bloomberg, the recent uptick has been spurred by "a worldwide rush for dollars as banks and fund managers scramble to pay back loans used to buy risky mortgage securities." Short-covering by bearish speculators has added further fuel to the fire.
Given the impact that currency moves can have on cross-border investment flows and the bottom lines of publicly-listed U.S. companies, many of which have significant exposure to export markets, it makes sense to try and figure out which sectors may benefit from further dollar appreciation and which may lose out.
One way of looking at it is to analyze the statistical relationship between monthly moves in the U.S. Dollar index and changes in the relative performance of each S&P 500 index sector, based on rolling 36-month "windows" or observation periods.
As the graph above seems to illustrate, over the past year or so monthly moves in the greenback have been positively correlated, albeit mildly, with relative returns in the consumer staple, telecom services, financial, and health care sectors. The opposite has held true with regard to the energy and materials sectors -- in other words, they have tended to outperform on a relative basis when the dollar falls and vice versa.
Given that the latter two groups have been exceptional long-term performers and appear to be "over-owned" by the institutional investing community, they could be especially vulnerable should the dollar continue its ascent.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.
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