Greenback and Small-Caps

Greenback and Small-Caps

Perhaps one of the most intriguing stories of 2014 was the explosive rally in the U.S. Dollar relative other other world currencies. As we are approaching Memorial Day weekend, the tune in 2015 is quite different for the greenback. Recent weak retail sales figures for the month of April has left investors second guessing the timing of a Fed rate hike, thus translating into additional weakness in the U.S. Dollar Index. Since reaching an 11-year high on March 16th, 2015, the mighty dollar has corrected over 7%.

Rewinding a bit back to 2014 (and early 2015) the strengthening U.S.  Dollar was taking a toll on the profits of large U.S. multinational corporations. In late 2014 and the early part of this year, there was a rush to own stocks with as little dollar exposure as possible, so it was small and mid-cap stocks with the advantage. Now we are seeing that pendulum swing back to the other direction and investors are flooding back into large and mega cap names… The S&P 500 hit a record high today

Chart below highlights the U.S. Dollar Index along with the relative performance of the Russell 2000 to the S&P 500. Not to state the obvious here, but the correlation of the greenback to relative performance is pretty apparent. Overall, it’s clear the intermediate trend of the dollar is up and correction doesn’t seem all that farfetched given the explosive move. As the Federal Reserve is probably one of the only central banks expecting to raise rates in 2015, it will be interesting to watch the behavior of small-cap stocks.  

Tom PsarofagisComment