US stock market vs USD

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randomizer
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US stock market vs USD

Post by randomizer » Wed Jan 17, 2018 6:11 pm

The Dow has had an amazing year:

Image

But when you chart the USD against the EUR we see pretty much the opposite picture (similar graphs if you chart against GBP or CAD):

Image

Is this a coincidence or is there a relationship? Would it be valid to say that the gains in the US market somehow aren't "real" because they're only perceived from within the US?

I suspect the answer is going to be "it's complicated" or "it depends", because when I chart the USD against other currencies, like JPY or AUD, the picture is not as clear.
87.5:12.5, EM tilt — HODL the course!

maylikesun
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Re: US stock market vs USD

Post by maylikesun » Wed Jan 17, 2018 6:19 pm

well, when I moved to Europe several years ago the exchange rate was 1.35. When we moved back to US in Jan 2017 it was 1.05.
So to me the rate just went back to normal....

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Phineas J. Whoopee
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Re: US stock market vs USD

Post by Phineas J. Whoopee » Wed Jan 17, 2018 6:54 pm

You raise a good point, one that should be understood.

The US dollar, USD, is the most significant reserve currency in the world right now, but it hasn't always been, and has been declining as a proportion of the total.

With respect to the type of study you showed, you have to choose what you mean by the reference price. Your chart shows EUR. With the USD most commonly held, it's often used. One could use the Japanese Yen, JPY, Euros, EUR as you did, Swiss Francs, CHF, or others.

One faction holds the only appropriate standard is gold, XAU. If the price of gold in USD went up, the idea is it doesn't mean gold changed in value. It means the USD is worth less. It is not a majority view, but being in the minority doesn't conclusively demonstrate something is incorrect.

International Monetary Fund Special Drawing Rights, SDR, based on a basket of major currencies (the Chinese Yuan, also called the Renminbi, CNY, was added not long ago) are another possibility. So is the Dollar Index, DXY, also based on a basket.

The problem is one of assigning relative values against an absolute, where there is no, so far as I can see but I know there are other opinions, absolute to choose.

If we're to look at the USD declining, what do we look at it declining against, and for what purpose? The issue is the same for any major currency.

PJW

1nv35t
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Re: US stock market vs USD

Post by 1nv35t » Wed Jan 17, 2018 9:49 pm

2017 and the S&P500 was up 10.6% for a UK (GB Pound) investor, something like +7% for a Euro investor. Compared to +11.9% for UK large cap index (FTSE 100 - 100 largest stocks by market cap).

CISCO is a reasonable example as it lists in both US and Mexico.

Compare the two listings for the exact same stock and ...

Image

of the order +16% (MX) versus 37% US (Nasdaq).

Comparing US$ to a collective basket of major currencies and 2017 saw US$ relatively decline

Image

which in compensation had US share prices rise more in US$ terms than other currencies.

Similarly gold rose something like 10% in US$ terms, but just 2% in GBP terms.
Is this a coincidence or is there a relationship?
Factor in large cap stocks with a global presence will tend to achieve broadly similar results if they list in NY or in London (wherever) and the difference in share price changes in the two countries currency will be a consequence of the FX (currency) changes. Relationship, not coincidental.

Part of the reason to hold international stocks is that foreign currencies can be as good as gold when the domestic currency is in crisis/relative decline. But rather than just having idle cash or a block of gold as a doorstop, investing that cash in stocks with a global presence will tend to see comparable stock rewards +/- FX (currency) changes. As though it were buy one get one free (stocks + gold) all wrapped up into the combined gain/loss of the two.

Why the 2017 $ decline? Perhaps concerns about N Korea, or maybe money that flowed into the US$ in 2014 (that resulted in the $ relatively rising) perhaps because of fears in Europe/elsewhere at that time (US is seen as a safe haven), might now be seeing less risk in Europe resulting in a outflow of US$'s. Who knows. FX is the world largest trading environment, churns more $'s in a week than stocks churn over a year. Incredibly difficult to predict and traders can be leveraged 100x (make large amounts of profits (or losses) from even tiny moves).

halfnine
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Re: US stock market vs USD

Post by halfnine » Thu Jan 18, 2018 6:58 am

Choice of base currency does that. I measure my net worth in a variety of currencies since I am not really country dependent. It is fairly common for my net worth to increase in one currency while simultaneously decreasing in another.

Valuethinker
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Re: US stock market vs USD

Post by Valuethinker » Thu Jan 18, 2018 7:30 am

Your base currency is the currency of future spending i.e. liabilities.

(note a mortgage is a liability for future housing costs, in a way - or at least one could probably look at it that way since ownership is an alternative to renting).

That's not easy to work out, sometimes, but the US has a surprisingly unintegrated economy with the rest of the world (for a free trading nation with an advanced economy). That's partly a function of size, but also for example US companies tend to locate overseas rather than export overseas (in the manner of Japan or Germany). That's partly simply a function of industry (Microsoft exports a lot, but that's just streams of electrons, so if they set up a host in Great Britain, say, presumably they stop "exporting" to the UK market; ditto Google -- and tax location really gets mucked in there).

Your big costs will be housing and healthcare, if you are US based. And you pay for them in USD. The price of housing in Tokyo or London or Djakarta has only peripheral impact on your housing cost.

Valuethinker
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Re: US stock market vs USD

Post by Valuethinker » Thu Jan 18, 2018 7:35 am

randomizer wrote:
Wed Jan 17, 2018 6:11 pm
The Dow has had an amazing year:


Is this a coincidence or is there a relationship? Would it be valid to say that the gains in the US market somehow aren't "real" because they're only perceived from within the US?

I suspect the answer is going to be "it's complicated" or "it depends", because when I chart the USD against other currencies, like JPY or AUD, the picture is not as clear.
No to the first question.

There actually is (some) correlation-- currency down, stocks up. When for example the GBP falls, the FTSE 100 (the index of the top 100 stocks, about 84% of the overall FTSE All-share index of UK stocks) goes up. Roughly speaking a -10% fall in currency against USD and EUR gives +6-7% increase in FTSE 100. The sensitivity is greatest to the USD because for example the top 10 companies (about 40%of the index) are heavily dollar exposed: HSBC (Hong Kong Dollar, which is USD linked), Diageo (Johnny Walker & Guinness), British American Tobacco (owns Reynolds now I believe), GSK & Astra Zeneca (pharma), BP/ Shell etc.

The biggest US companies are all multinationals and so the same effect - USD falls, their earnings from overseas are higher.

However the USD is the currency of denomination of the world, especially commodities. Thus to some extent these multinationals hold their assets in dollars, are paid in USD etc.

It's only when you get bad news re USA that you can get USD falling *and* stock prices falling.

It does matter what your currency of liability is, but the price gains are real.

sean.mcgrath
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Re: US stock market vs USD

Post by sean.mcgrath » Thu Jan 18, 2018 8:01 pm

1nv35t wrote:
Wed Jan 17, 2018 9:49 pm
Why the 2017 $ decline?
I would argue it's fairly simple: purchase price parity (PPP). I track the Euro/USD because both are important to me (both earnings and expenses). If you look since currency controls were dropped in the 80s, on average the two have been withing 1-2% of their PPP rate, albeit with massive swings in both directions. $1.25/Euro is about in balance and we are almost there. I have no idea how to predict when the swings will happen, but to predict that the Dollar would drop in the coming few years vs. the Euro was not very difficult....

Cheers,
Sean

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Epsilon Delta
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Re: US stock market vs USD

Post by Epsilon Delta » Fri Jan 19, 2018 5:41 pm

randomizer wrote:
Wed Jan 17, 2018 6:11 pm

But when you chart the USD against the EUR we see pretty much the opposite picture (similar graphs if you chart against GBP or CAD):
You need to plot those graphs on the same scale. The stock market graph shows a ~30% gain. The currency graph shows ~8% loss. Not really opposite pictures.

Recently I was looking at a plot of USD v. bitcoin. It looks just like the plot of USD v. Euro, until you look at the vertical scale and realize that bitcoin is moving by 10% per hour rather than .01% per hour

Caduceus
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Re: US stock market vs USD

Post by Caduceus » Fri Jan 19, 2018 8:39 pm

Your investments have a fundamental return component and a currency return component. The fundamental return relates to whether the firm actually is earning more (selling more products or services, etc.) and the currency return relates to the quoted price in different markets.

When a currency weakens relative to its other currency pair, the quoted value of the investment will go up. For example, Vanguard Europe trades both in the US (as VGK) and in the UK (as VEUR). If the US dollar strengthens against the pound, VEUR (the GBP-denominated fund) will go up. If it didn't, arbitrage would occur, because this is the same product selling in two different markets. This applies to just about everything, not just the quoted price of index funds. If there are frictional/transactional costs, sometimes there will be a price difference between two exactly similar goods trading in different markets.

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