International positions benefit from weakness in the dollar
While U.S. equity markets have generally been going up over the past six months, some unexpected leaders have emerged in the past few weeks. If you have paid any attention to the financial media in recent weeks, you have no doubt heard comments about significant weakness in the U.S. dollar.
The U.S. markets have done well, but many foreign markets are doing much better. The chart below shows how the dollar compares over the past six months to a couple of other currencies. Although I have used the euro and yen for this example, almost all other currencies are outperforming the dollar in recent months.
You have also undoubtedly heard that gold is at record high levels. That is also primarily a function of a weaker dollar. While gold has traditionally been used as a hedge against inflation, many traders and investors are now using it as a hedge against a weaker dollar.
Perhaps the most important question one might ask is why the dollar is weakening against other currencies. The main reason is because of the huge debt the U.S. government has amassed in an attempt to jump start the economy. Each dollar the government prints drives down the value of all the other dollars in circulation.
One can debate whether a weak dollar is good or bad for the U.S. economy. That really is not a critical concern for investors at this time. What investors need to know is that as long as the dollar remains weak, other alternatives are likely to outperform the U.S. stock market. Right now those alternatives include some commodities and some international funds.
The chart below shows how the S&P 500 has fared over the past six months compared to some other investments. For the period, the Latin America ETF (ILF) has shown great strength. Oil has been very good over the past month, but has faltered slightly the past couple of days. Although gold is at record highs, over the past six months it is still trailing the S&P 500.
Many of the investments that benefit from a weaker dollar carry high volatility and might not be suitable in large doses for investors with a conservative or even moderate risk tolerance. So investors taking positions in these types of investments need to be cautious in their approach.
F.S.