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.