The Effect of US Dollar on Equities

   Schwaben Blog

November 13, 2015

Weekly Statistics:

Today Week Ago Year Ago
13-Nov-15 06-Nov-15 13-Nov-14
S&P TSX 13,075 13,553 14,843
S&P 500 2,023 2,033 2,039
DJIA 17,245 17,910 17,652
OIL $40.73 $44.52  $75.01
USD vs CAD 0.7507 0.7537 0.8827
Gold $1,083 $1,088  $1,165

In the S&P 500, 444 companies have reported their earnings for Q3 2015 until last week. 74% of those companies have reported earnings above the mean estimate and 46% have reported sales above the mean estimate. The blended earnings decline for Q3 2015 is -2.2%, compared with earnings expectations of -5.2% on September 30, 2015. This will mark the first back to back quarters of earnings decline since 2009 if the index reports a decline in earnings for Q3. It will be almost certain that the overall earnings will be negative unless the remaining 56 companies report stellar results. The blended sales growth is -3.7%. Two main factors responsible for decline in earnings and sales across the index are strong  US dollar and a struggling Energy sector. The Energy sector was the largest contributor to the year-over-year declines in both earnings and revenues for the index. The blended earnings growth rate for the S&P 500 (ex-Energy) for Q3 is 4.5%. Hence Energy has contributed -6.7% to earnings this far. The other factor for decline in earnings and sales is strong USD. A recent analysis by Factset to quantify the effect of strong USD on S&P 500 companies found that companies that generate more than 50% of sales inside the US had a blended earnings growth rate of 4.8% but for companies that generated less than 50% of the sales inside the US, the blended earnings growth is -10.6%. The results were similar for the blended sales growth rate. This is a sign of the worsening effect that a strong USD has on the US conglomerates. After last week’s astounding payroll report, analysts and economists have become overly confident of a rate hike in December. According to CME FedWatch tool, there is a 70 % probability of a rate hike during FOMC meeting in December. Should interest rates increase, then there is a 69.8% probability of a 50 basis points hike and 30% probability of a 25 basis points hike.  The high likelihood of a rate hike led to  sharp decline across all major indices this past week. A rate hike in the US would lead to a stronger US$, the greater the rate hike the more the US$ would strengthen. The graph below compares the change in price of the S&P 500 with the change in Forward 12 month Earnings per share for the index.

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