If you are a regular consumer of financial news, quite likely you have heard that in recent months the US Dollar has been gaining strength vs. other world currencies. Here’s a very broad look at how the stronger US Dollar may influence your portfolio returns.

In several ways, the investment landscape of 2018 looks very much like 2017 – Domestic and International Equities remain the number one and number two favored asset classes. Within the equity classes, Growth stocks remain favored over Value. Overall, Technology remains the number one ranked domestic equity sector. So, many things look the same this year as last. However, there are also some notable differences: 2018 has thus far seen higher market volatility, higher interest rates and…a strengthening of the US Dollar.

Over the last 90 days (through 5/21/18), the NYCE U.S. Dollar Index Spot DX/Y has gained 4.41%. While a stronger dollar may be good news for anyone planning a trip abroad this summer, it is not as opportune for investors with exposure to international assets. And it’s quite likely that you are wondering what the strengthening dollar means for your portfolio.

Chart Courtesy DorseyWright

As the chart above illustrates, last year’s falling dollar manifested itself in a very strong emerging market and developed foreign market – with very strong returns. This year, however a rising US Dollar creates a challenging environment for international equities – the returns on emerging marketing equities during rising dollar periods are less than a quarter of what they are during falling dollar periods, while the return on international developed equities becomes negative when we look only at rising dollar periods. Over the last 30 days, we’ve seen near-universal deterioration in the fund scores of non-US funds (Using our method of ranking asset classes); this has been especially pronounced in less developed markets – Latin America, Frontier Markets Equity, Middle East Africa Equity, and India are among the five groups with the largest score deteriorations in the last month.

You have likely also noticed that your managed portfolios now hold significantly fewer assets in the emerging market space and international developed space. A quick study of the above chart will likely answer your questions as to ‘why’ these investment areas have been reduced.

Market Minute 6/1/2018 – “I’ll just hold the index”

This topic does pop up from time to time – typically when I speak with an engineer. Seems that some of the math-oriented people, when asked how they manage their portfolio, have the ‘I’ll just buy the index’ response. Often they will add, ‘One cannot beat the Index, so why even try?’ I normally then ask ‘Which Index?’ and that’s when the conversation, predictably, takes an interesting turn.

For the sake of illustration let me say that most often ‘the index’ is a reference to the widely known S&P500 Index. But, there are a lot of ‘index’ things. There are NASDAQ, DJIA, several Russells, and Wilshires, just to name a few of the most famous. Surely they can’t (and don’t) all perform equally. And, to make life even more interesting, there are now hundreds (at least) of indexes available for investment through various companies’ ETF (exchange-traded fund) offerings. (An ETF can often come very close to the returns of an index, but it is investable, whereas the actual index is not.) 

So, here’s the food for thought.  (Returns courtesy Dorsey-Wright). These are the returns of a number of indexes from the end of 2007 through 12/31/2017.  

Index                                     Return for Time Period                   My Comment

S&P500 standard                              85%                                       We’ll consider this the starting point

S&P equal weight                            259%                                     Rather better than the standard S&P500

S&P Midcap Index                           337%                                     Significant outperformance vs standard

SML S&P Smallcap                           400%                                     Obviously a better return

As we move down the chart we are moving from the S&P500 index which contains the largest size companies weighted by their market capitalization. As we move to the S&P equal-weight index we have the same 500 companies but they are all equally weighted so the average size of a holding is smaller. The Midcap has still smaller company size in that index, and finally the Smallcap index is the index with the smallest size companies. DSWP clients routinely benefit from a system developed by Charles Dow back in the 1880s. This system provides substantial insight into determining which indexes, stocks, and funds have the most relative strength vs. their peers — obviously good things to know if you have an interest in ‘indexes’. 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.