• Michael Rosen
  • Investment Insights are written by Angeles' CIO Michael Rosen

    Michael has more than 30 years experience as an institutional portfolio manager, investment strategist, trader and academic.

DOLLAR

Published: 02-06-2015

My quarterly letter talks about the strength of the US dollar and why it should continue to rise (see Chart below), but I wanted to note here the huge impact currencies have had on investors in the past year.

usd

Since January 2014, US equities are up 13%. But so are European equities, and Japanese stocks are close behind (+10%). However, these numbers are in local currencies, and the euro is off 20% and the yen off 12% against the dollar this past year, so, for a US investor, in dollar terms, European equities are not up 13%, but are actually down 7%, and Japanese stocks are not up 10% but down 2%. Conversely, European investors enjoyed a 37% gain in US stocks last year (13% + 20% + compounding) and Japanese investors saw a 27% increase. From a US perspective, the gap in returns between US and European stocks is as wide as we’ve seen in over 50 years (see Chart below).

us-eur

With this sort of divergence in performance, it is reasonable to look for a reversal: US stocks to underperform non-US markets. Yet, for all the reasons I noted in my quarterly letter, the US dollar could appreciate further, especially in the context of the first graph, above, where it is still relatively low historically. Dollar strength is a headwind for non-dollar assets, which I suspect will continue to blow.

Whether the dollar continues to strengthen or turns around, US markets surge to new relative highs or mean-revert, I think caution is probably in order: take modest bets and watch them closely.

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