Impact of a falling dollar on Equity Sectors

Equities tend to rise as dollar falls? Well, according to the recent study by Wellls Fargo Investment Institute dollar’s long-term correlation with the S&P 500 is somewhat negative, i.e. equities tend to rise as the dollar fall but there are exceptions.

The study examines the impact of a falling dollar on equity sectors. The chart below sums up how the stock market and a variety of sectors have performed during past episodes of dollar weakness stretching back to 1988:

Dollar weakness has generally been seen as a positive, in particular, for shares of companies, typically large-cap multinationals, who derive a larger share of their revenues overseas.

However, the chart reinforces:

1. that companies in the information technology and materials sectors —with a significant share of sales from overseas—have seen their stock prices outperform when the dollar weakens.
2. Sectors heavily focused on U.S. business—including utilities and consumer iscretionary — have lagged.

Reference: MarketWatch, 2020-08-05, “What Stock-Market History Says about a Falling Dollar”