As earnings season unfolds, we are hearing many company managements mentioning foreign exchange issues as headwinds — when you hear “currency neutral” numbers being reported, it is likely that under the hood, there are negative foreign-exchange effects to be found. A strong dollar will hurt many companies which are reliant for their growth on sales in Europe and Asia.
A lot of stocks have come down a lot since the first cracks began to show in the post-pandemic bull market back in November. Companies are using this earnings season to reset expectations, which could lead to beating estimates in coming quarters. The immediate behavior of stock prices after earnings can see unrelated to earnings themselves, or even expectations, and likely has to do more with positioning leading into the earnings release. We’ll have to get through earnings season to find out which companies will be on track to really beat these lowered expectations.
This is a period in which companies which are well-positioned with respect to labor and raw material input costs, supply chain management, balance sheet strength, foreign exchange exposure, and many other factors can outperform the market. We mentioned GARP stocks above, and we believe some of these are approaching or have reached attractive levels.
For various reasons mentioned above, we do not think it is an appropriate time to add to China exposure. In fact, broadly, a global situation of dollar strength argues against exposure to most foreign markets, except under very specific conditions. Our rule is that only if earnings growth in US dollar terms of a foreign asset is superior to that available in the US should an investor consider it, and that will be a high hurdle for almost all non US stocks today.
Gold is under pressure in a rising dollar environment, and while there are some risks ahead — for example, the upcoming November elections in the U.S., and before that, the spectacle of another fraught debt-ceiling battle — we do not see imminent relief from dollar strength. We like both gold and some cryptocurrencies longer-term; but for disparate reasons, the near-term outlook for both of them is mixed.
Our Next Zoom Call
We’ll be hosting a Zoom call on May 5, following the Fed’s next meeting. We look forward to discussing all these topics in greater depth, and hope to see you there.
Thanks for listening; we welcome your calls and questions.
