True or False - A Weak $ Benefits Large Cap Stocks

Over the past few years we’ve cited the lagged relationship that exists between trends in the US dollar and the relative performance between large and small cap stocks. And although you’ll often hear recited the confident truism that a weak dollar is better for large cap companies, the reality in the markets is a bit grayer, more nuanced and certainly more counterintuitive than most would suspect. While over shorter time periods a weak dollar has at times correlated with large cap outperformance, from a long-term relative performance perspective - small cap stocks have tended to outperform during major dollar downtrends and underperform during prolonged periods of strength. They outperformed in the 1970’s with a weak dollar - and since 1999, the RUT:SPX ratio has continued to trend higher. Why? Like many causative motivations in the markets, it’s likely a variety of interconnected and shifting conditions that is far more complicated than an old market adage provides. These range from leading industry cycles, to the attraction of capital by foreign investors - to whether hedging strategies were or were not implemented.

Fundamental reasoning aside, we have viewed the trend change in the SPX:RUT ratio this year as a potential major cycle pivot and have developed our longer-term market postures from the comparative bearings of the ratio’s previous cycle low in 1994. If past is prologue, there exists an approximate one year lag between pivots in the respective cycles. When the SPX:RUT ratio failed to breakout last year and began to roll-over one more time, it was a leading indicator for us of a possible trend change downstream in the dollar, which we expected would eventually follow the ratio lower - similar to the market dynamics present in 1994 and 1995. 

Despite the US dollar’s strong performance throughout July, we remain confident that the index will follow the lead of the SPX:RUT ratio last year and plumb the bottom of its long-term range. Once again emboldening the flawed truism for a spell that a weak dollar is better for large cap stocks.

image

image

image

View Comments (0)

Recommended for You

  • Bill Gates Is At Least $6 Billion Richer Than He Was Six Months Ago, But Not From Microsoft

    In July, Bill Gates may or may not have lost his title as the world's richest man. According to Forbes, Gates has a net worth of almost $82 billion, which puts him in the No. 2 spot behind Mexican telecom magnate Carlos Slim, who's worth $85.4 billion. According to Bloomberg, Gates is still the…

    Business Insider
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • 3 Lessons An Investor Learned After Losing His Job, Reputation, And $1.6 Million

    The late Jim Paul went from a poor Kentucky boy to serving on the board of governors of the Chicago Mercantile Exchange through a series of lucky breaks and smart investments. By 1990 he was working in the futures research department at Morgan Stanley Dean Witter & Co., managing a team that…

    Business Insider
  • Silver Is Getting Crushed

    Silver is getting crushed. On Friday, Silver fell more than 3% to less than $18 an ounce, its lowest level in more than four years. The price of gold also fell about 0.8% and touched its lowest level since January.

    Business Insider
  • Bitcoin tanks, is Alibaba to blame?

    The price of bitcoin has plummeted in the past few days, and some are blaming the Alibaba IPO for the virtual currency's fall. Members of the bitcoin community are pointing fingers at the e-commerce giant's IPO, suggesting that tech-minded China-centric money is being pulled out of the currency in…

    CNBC
  • Chinese buyers lead charge in iPhone 6 global debut

    Buyers from China, deprived of the latest iPhone launch at home, were Friday among the first in line in Japan to grab the "6" and its new large-screen cousin as Apple hit back at rivals. Licensing problems in China meant the global rollout went ahead without the huge and lucrative market, in a blow…

    AFP
  • Eric Holder’s Shameful Legacy on Wall Street Fraud

    Right in the middle of the midterm election season, and just before Attorney General Eric Holder reportedly might step down, he made it known that the Justice Department will really really indict Wall Street executives in financial fraud cases. “We expect to bring charges in the coming months,”…

    The Fiscal Times
  • Live blog: What’s happening with Alibaba’s IPO?

    The big day has arrived, and the Chinese company that 88 percent of Americans have never heard of is making history on the New York Stock Exchange. We’re rounding up all the facts, sass and stories you need to hear as Alibaba’s IPO unfolds. For the business

    Gigaom
  • The Steps To Success

    Who is the one person who has had the biggest impact on your life?

    AdChoicesstrayerSponsored
  • Can Sears Close 2,300 Stores?

    In a widely publicized note to investors, Gary Balter of Credit Suisse said that it is best that Sears Holdings Corp. (SHLD) close its Sears and Kmart locations while they, and the inventory they sell, still have value. Sears Holdings operates about 2,350 stories. Sears is generating negative…

    24/7 Wall St.
  • Play

    Analyst: Alibaba Stock Is Priced Conservatively

    Morningstar director of equity research R.J. Hottovy joins MoneyBeat and explains why he views the company's shares priced conservatively at its IPO.

    WSJ Live
  • 'Bubble in everything, everywhere': Marc Faber

    Even after the Dow (Dow Jones Global Indexes: .DJI) and the S&P 500 (^GSPC) closed at new all-time highs, closely followed contrarian Marc Faber keeps sounding the alarm. Faber has long argued that the Federal Reserve's massive asset purchasing programs and near-zero interest rates have inflated…

    CNBC
  • Cramer: This is how you bottle Alibaba's magic

    On Wall Street, the Alibaba IPO feels every bit as magical as its exotic namesake as investors clamor for a piece of this exciting story and dream about its hidden riches. If you're about say "Open sesame" Jim Cramer doesn't want you to get carried away. "I am blessing paying as high as $80 a…

    CNBC
  • Stock Market Blogger 'Jesse Livermore' Is Calling The Top

    On Friday, Alibaba is set to make its debut on the NYSE in the largest IPO ever.  Jesse Livermore, the pseudonymous blogger of Philosophical Economics, on Thursday night noted that in 2012, Facebook's IPO marked the market bottom for the year, and sees Alibaba's debut as potentially marking the top…

    Business Insider
  • Personal Finance: Use 401(k) to pay down mortgage?

    Veteran personal finance journalist Robert Powell answers your questions for USA WEEKEND.My wife and I are thinking of paying down the mortgage on our house with money in our 401(k) plans. — David Love, Bedford, TexasAt a very high level, you will owe income tax on any pre-tax portion of the…

    USA TODAY
  • Often Overlooked Method to Pay Off Mortgage

    If you own a home and pay for a mortgage, you could reduce your payments by an average of $4,100 a year. Here is how it works.

    AdChoicesRateMarketplaceSponsored
  • Play

    A Favorable Prognosis for This Pharma Stock

    Recent clinical success in cystic fibrosis positions Vertex as a dominant player in this attractive rare-disease market.

    Morningstar
  • How Boeing's bumpy 787 launch is paying dividends

    New Boeing 787 Dreamliners taking off from Paine Field in Everett, Washington. It took Boeing Co. 10 bumpy years to turn its 787 Dreamliner concept into a commercial success. At least that's the conclusion from aerospace analysts at Jefferies, who in a note published Thursday write that all those…

    MarketWatch
  • Jack Ma set to be one of the world's 20 richest?

    Jack Ma -  If you don’t know his name already, you’ll likely know it before the week is out. Ma is the richest man in China, and stands to add billions to his net worth before the end of the week. In the early 90s, Jack Ma was a schoolteacher in China.

    Yahoo Finance
  • 3 Chinese Stocks That Are Better Bargains than Alibaba

    All eyes are on Alibaba Group Holding (BABA) as the Chinese e-commerce giant makes its U.S. Alibaba dominates Internet sales in the world's most populous nation, moving more merchandise than Amazon.com (AMZN) and eBay (EBAY) combined and serving up healthy profits. When the stock begins trading on…

    Kiplinger
  • Lacker Says He Opposes Fed Plan to Hold Mortgage-Backed Assets

    Federal Reserve Bank of Richmond President Jeffrey Lacker said he couldn’t fully support the central bank’s revised exit strategy released this week because he opposes a measure to hold mortgage-backed securities. “I believe this approach unnecessarily prolongs our interference in the allocation of…

    Bloomberg
  • Bears’ Jeffery Joins Fantex for 13% of His Future NFL Earnings

    Alshon Jeffery of the Chicago Bears has become the fifth National Football League player to enter a brand contract with Fantex, Inc., which bought 13 percent of his future earnings for $7.94 million in advance of selling shares in the Pro Bowl receiver to the public. Fantex also has agreements with…

    Bloomberg
  • AARP® Auto Insurance Program from The Hartford

    50+? Request a free quote and you could save $404* on Auto Insurance from The Hartford!

    AdChoicesThe HartfordSponsored
  • What Roth Owners Should Do if They Exceed the Income Limit

    You can avoid the 6% penalty on the money you contributed if you take your 2014 contributions (and any earnings on them) out of the Roth before the tax-filing deadline on April 15, 2015 (or October 15, 2015, if you file an extension). You can also avoid the penalty and taxes if you have your IRA…

    Kiplinger