Everyone loves a discount.
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Bargain shoppers will come from miles around to buy a rump roast or the latest high-tech gadget just because some store has it cheaper. Advertisers routinely promise they’ll pay the difference if you can find a better price.
Investors are no different. They’re always shopping for a bargain.
Now investors outside the U.S. are purchasing companies in the Standard & Poor’s 500 Index at the cheapest valuations on record, their buying power boosted by an eight-month decline in the dollar.
Why the Dollar Is Failing
As threats of a financial meltdown fade, the dollar is falling prey to a record budget deficit, interest rates near zero and almost imperceptible growth. Since February, the dollar is down 10 percent against the legal tender of many of its major trading partners, including Canada, Europe, Japan and Australia.
For President Obama, it’s the sharpest drop for a new occupant of the White House since Ronald Reagan’s Treasury Secretary James Baker convinced U.S. trading partners to boost the Deutsche mark and Japanese yen by debasing the dollar in 1985.
On active trading today, the Dollar Index, which measures the currency against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, dropped to its lowest level since August 2008.
The latest drop in the dollar came following its sharpest two quarter upswing in 16 years. Up to that point, the dollar remained strong because the U.S. was considered a haven in the brewing storm. Now that the worst seems to be over, investors have started to renew their appetite for risk, and, at the same time, rapidly unwind their dollar holdings.
Many market-watchers believe that President Obama’s effort to lead the world economic recovery by spending the U.S. out of its recession is undermining the dollar, triggering record commodities’ rallies as investors scour the globe for hard assets. It has also had the additional benefit of making U.S. assets, and in particular stock in American companies, more attractive for foreign investors.
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The rapidly shrinking dollar has allowed these investors to purchase companies in the Standard and Poor’s 500 Index at the cheapest valuations on record.
The New Bottom
Currently, the S&P 500 is priced at 19.9 times earnings. This is the biggest discount on U.S. shares since May 2003 for the 23 countries whose more than 1,500 stocks are encompassed by the MCSI World Index. For money managers based in Europe, the cheaper currency conversions push the average cost for a dollar of U.S. profits down to 13.6 euros, the lowest level ever relative to the value of global equities.
At the present time, overseas investors hold almost $2.5 trillion in U.S. equities. While more losses in the dollar would cut returns, the last time U.S. stocks were this inexpensive, in 2003, the S&P 500 began a four-year, 62 percent advance.
U.S. stocks are not the only beneficiaries of the cheaper dollar.
Gold has risen more than 19 percent this year. Today it touched an all-time high of $1,068.40. Copper has rallied 103 percent with the biggest three-quarter rise in at least 21 years. Crude oil, up 64 percent, just finished its steepest eight-month climb since 1999. Aluminum has gained 24 percent, propelled by its best two quarters in a dozen years or more.
Two Opposing Perspectives
On the world stage, commodity-backed currencies of Australia, New Zealand and Canada, along with the Brazilian real, South African rand and Norwegian krone, have been the biggest gainers against the greenback this year as traders bet on assets that would benefit from a global recovery.
The weaker dollar, however, remains a double-edged sword.
On the one hand, dollar anemia has been a boon for U.S. exports, making them more competitive to overseas purchasers. The lethargy of the dollar has also helped to re-inflate the stock market. But at the same time, the progressive weakening of the greenback is undermining the U.S. dollar’s preeminence and is threatening its status as the world’s only reserve currency.
Although the dollar has been taking it on the chin, most analysts seem to agree that the U.S. currency will halt its slide as soon as the Federal Reserve and Chair Ben Bernanke decide to raise interest rates, which have effectively hovered near zero for the past 12 months.
Despite the steep rise in commodity prices and precipitous fall in the dollar, most forecasters also agree that Bernanke and the Fed will not raise rates to combat inflation while the unemployment rate is still growing. Unless the job market stabilizes with unemployment dipping near 8.5 percent, it’s likely that Bernanke will stand pat on interest rates.
Until then, the U.S. will remain the bargain basement to the world.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
