What a Weak Dollar Could Mean in 2021

Posted In: COVID-19 Market Update

With everything else going on around us, it remains important to pay attention to investment trends and money flows. As our team analyzes trends, we are always looking for factors that may provide headwinds or tailwinds for stocks, while also seeking to profit from companies improving society.

 

One big trend in 2020 is the falling dollar. Before COVID-19, the U.S dollar was in a major eight-year bull market moving to an all-time high in March. However, since the pandemic began, the U.S. dollar has been rapidly declining, hitting a multi-year low:

 

 

The euro has gained 8% against the U.S. dollar in 2020 and is on pace to have its best year against the dollar in years. With the dollar sliding, the trend looks like it should continue for several reasons:

  • Interest rates are expected to remain near 0% through at least 2023.
  • More financial stimulus from Washington should soon unfold.
  • Other countries around the world are expected to see stronger economic recoveries.

 

All these factors should keep the dollar weaker for some time. The dollar’s weakness and record low interest rates have also sent Treasury yields plummeting. The 10-year Treasury yield is now at 0.90%. With the massive amount of federal debt and the $3 trillion annual deficit in the U.S., we are expecting the U.S. dollar to remain weak in 2021, and a weaker dollar tends to make the economy grow slower than it otherwise would. The reason is that when a currency is declining (or at least isn’t stable investors tend to invest their money elsewhere.

 

So the big question is, will the weaker U.S. dollar help or harm stock investors?

 

Despite the potential for general economic harm, there are a few types of companies that should get a boost from a weaker dollar. The biggest influence for the U.S. dollar is its impact on corporate earnings. Nearly half of the S&P 500 companies’ revenue comes from foreign sales, so a weaker dollar can actually boost corporate sales and earnings for multinational and international companies.  These multinational, global companies should be able to withstand a weaker dollar.

 

A weaker dollar also supports technology companies that benefit from global sales. Case in point: with a weak dollar in 2020, technology stocks have had a fantastic 2020. The Nasdaq index is up over 38% this year, while the S&P 500 is up 13%, and the Dow Jones Industrials are up just 5%.

 

Additionally, the weaker dollar and low interest rates should continue to attract money into dividend-paying stocks. Dividend stocks have far lagged the broader markets in 2020.  More recently, however, dividend stocks have seen an uptick in money flows as investors seek higher interest rates in a near 0% interest environment. This trend should continue in 2021.

 

Matthew 10:16 says: “Behold, I send you out as sheep in the midst of wolves; so be wise as serpents and innocent as doves.” We seek to advance the kingdom of God and also to be wise with how and where we invest. That is why we spend so much time analyzing trends and looking for opportunities.

 

As we look toward 2021, we expect the U.S dollar to remain weak and interest rates to remain low. This should benefit multi-national/foreign stocks, technology stocks, as well as dividend-paying companies. These three types of companies should outperform in the year ahead. Along with these, our team continues to focus on companies that are sales and earnings leaders in their respective industries.

 

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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