Recently a question came up around how currency price movements can affect stock investments.  Some might suggest this topic is best covered right before bed as a substitute for melatonin …

Currencies can fluctuate for several reasons: supply/demand, interest rate differentials, inflation expectations, geopolitics, and momentum, among others. Currency movements can impact the results for both U.S. and non-U.S. investments. In essence, for U.S. investors, a declining U.S. dollar is a tailwind for international investment results, while an increasing U.S. dollar is a headwind.

Why is this important?

During four of the past five years, the U.S. dollar was, for the most part appreciating, creating a headwind for international investments. Importantly, broad international investment results were positive during this period but were negatively impacted by currency movements. Since late March, however, the U.S. dollar has reversed course and has been weakening, which has been good for international investments. Since late March, this tailwind of a declining U.S. dollar has added about 10% additional return to international results.

A well-diversified portfolio participates in several asset classes, including various regions of the world and currencies. These different asset classes or factors all go through cycles, and importantly, at different times. The net result, which we frequently comment on, is that a well-diversified portfolio is not reliant on any single asset class or factor for success. Diversification can seem sleepy at times, however, when markets diverge, the benefits sometimes shine.

Market Comments

• U.S. stock market results were mixed on the week with technology companies coming under negative price pressure throughout the week

• Second-quarter corporate earnings results have been, in general, better than expected however companies continue to be reluctant to provide forward guidance (source: Factset, Inc.)

  • As of Friday, about 25% of companies in the S&P 500 have reported results

• Early results on Eurozone manufacturing data show the strongest growth in two years; the surprise to the upside comes as those economies continue reopening after the coronavirus-induced shutdown (source: markiteconomics.com)

• Initial jobless claims data this week showed an increase in claims; a weakness in the reporting that has not been seen since March (source: dol.gov)

• The U.S. government continues to work on plans for an additional stimulus package; with debates centering on unemployment insurance amounts and possible additional stimulus checks

  • Importantly, the $600 per week additional unemployment insurance is scheduled to end next week

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