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Premarket stocks: Strong dollar has an unexpected victim

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A version of this story was originally published in the CNN Business’ Before the Bell newsletter. Not a subscriber? you can register right here. You can listen to the audio version of the newsletter by clicking on the same link.

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The strong dollar has been a headwind for blue-chip US companies in the Dow and S&P 500 this year.

This is understandable as a rising US dollar depletes the international profits of companies that have significant influence overseas, such as Apple (AAPL), Procter & Gamble (PG), McDonald’s (MCD) and Coca-Cola (KO).

However, it may come as a surprise that smaller U.S. companies, which tend to be more locally focused, have not held up better during a stronger dollar.

What’s happening: The S&P SmallCap 600 index is down 22% this year, just slightly less than the S&P 500’s 25% drop. And the Russell 2000, another index of mostly smaller companies, fell 25%.

This is unexpected given the profile of small-cap companies. “Small-cap stocks suffer less from a US-based and stronger US dollar in terms of revenue risks than large multinationals,” said Jim Besaw, chief investment officer at GenTrust.

Note that it says “less likely to be injured”.

The problem is, investors are worried about a looming economic slowdown in the U.S., so any benefit from a stronger dollar — namely less exposure to the global economy — is offset by domestic recession concerns.

Also, the dollar is very strong – the US Dollar Index, which tracks the dollar against the euro, sterling, yen and several other currencies, has risen 18% this year – making foreign imports cheaper. This is bad news for smaller US companies trying to compete with their competitors in Europe and Asia.

However The Federal Reserve isn’t going to aggressively raise rates forever. The market is starting to price up with the prospect of some minor rate cuts at the end of 2023. In theory this should cause the dollar to start losing some of its value.

Meanwhile, some experts think there are parts of the US market where investors can hide, even among larger companies.

“Sectors with a more domestic focus, such as real estate and utilities, are less exposed to these impacts. The U.S. dollar remains a headwind for international equities and corporate income, but it may not continue to rise indefinitely, investment strategists Jason Pride and Michael Reynolds at Glenen said in a report.

Utility stocks held up marginally better than the rest of the market. The S&P Utilities index has dropped “only” 11% this year. This is partly because utilities stocks are considered more recession-proof. Consumers are likely to pay their electricity and water bills even in a crisis.

Utilities also pay huge dividends, which is even more attractive in such a volatile market.

Real estate stocks, however, were shaken by slowdown concerns in residential and office real estate. The S&P Real Estate Index has dropped 33 percent this year.

Underline: Nothing is completely immune from the effects of a strong dollar. Of course, some sectors may not be as badly affected as others. And multinational companies and foreign stocks will outperform smaller companies with little or no international exposure.

But the dollar is unlikely to weaken significantly as the Fed continues to raise rates. This will continue to be a problem for American consumers and investors.

“It’s a challenging environment for everyone,” said David Jilek, chief investment strategist at Gateway Investment Advisers, noting that the above-average volatility for the markets will continue until at least the first quarter of 2023.

The new finance minister in the UK has already begun to reverse British prime minister Liz Truss’s signature economic plan. Jeremy Hunt said he rolled back “almost all” of the massive tax cuts introduced by Truss’ previous financial chief, Kwasi Kwarteng. Kwarteng was fired on Friday.

As my colleague Julia Horowitz reports, this is a striking reversal. It stands for the “gap” of Truss’ growth plan. However, backtracking seemed necessary to reassure nervous investors who were devaluing the sterling. in the last few weeks due to concerns about government spending plans.

Even US President Joe Biden was skeptical of the UK’s drip proposal, calling the idea of ​​massive cuts a “mistake”, especially for the benefit of wealthier individuals and businesses.

Yet Truss and Hunt did not come out of the woods.

The UK government is promising to keep the subsidies in place until April 2023 to help limit how much consumers pay for energy as costs rise to exorbitant levels. But what happens next is unclear.

Chinese leader Xi Jinping is expected to soon secure an unprecedented third term as head of the Communist Party. As CNN Business’s Laura He points out, Xi now faces many major challenges to get the Chinese economy back on track.

China’s strict zero Covid policy has not stopped the pandemic from harming growth. Youth unemployment is rising rapidly and the quarantines imposed due to Covid have also led to more social unrest.

Meanwhile, China’s housing market is in the midst of a meltdown. And there are growing concerns about how continued China’s crackdown on large corporations and wealthy individuals could further hamper the economy.

Perhaps in an ominous sign, China announced on Monday that it is indefinitely delaying the release of GDP and other economic data this week.

Tap this morning:

Johnson & Johnson (JNJ), Goldman Sachs (GS), Lockheed Martin (LMT), Truist (TFC), State Street (STT) and Hasbro (HAS) earnings

Coming after closing:

Earnings from United (UAL) and Netflix (NFLX)


US housing begins; UK and European inflation; Earnings from Procter & Gamble (PG), Travelers (TRV), Baker Hughes (BKR), Tesla (TSLA), IBM (IBM) and Alcoa (AA)