The dropping dollar theme, which I wrote about on November 10th, is getting louder in the financial media. That’s partly due to the greenback’s further slide last week, but also to the widening recognition of the U.S. trade deficit and the impact it could have on foreign money in America.
In short, as the dollar becomes weaker, other currencies become stronger. Why would a foreign investor continue holding onto assets that are declining when they could be sold in favor of assets that are appreciating? He wouldn’t. Therefore, the money would leave the U.S. and head to other locations.
That would spell trouble for U.S. financial markets, which has left a number of financial journalists raising the red flag around U.S. investments. However, I would like to remind you of something I have made very clear in my books: the market is NOT your portfolio, unless you own an index fund. For instance, I’ve written extensively about Sun Microsystems on this site. While the stock market has declined, Sun has risen considerably from the $3.50 target I pushed. Similarly, when the market was rising over the summer and until a couple of weeks ago, Sun was spiraling downward toward my buy targets. So, don’t necessarily let talk of market trouble scare you out of the investments that you’ve carefully chosen for their individual merits. A bargain is a bargain, regardless of the backdrop.
That said, I believe the market itself in the form of the Dow could do just fine in a falling dollar environment. Where do the 30 Dow companies do business? Worldwide. Some of the companies, such as IBM, earn more than half of their revenue outside of the United States. Therefore, a declining dollar will actually boost the bottom line of such multinationals. Of course, a runaway bear market tends to sink all stocks as people sell indiscriminately. But an orderly decline in the dollar, which seems to be what’s happening so far, should show up as rising revenue for multinational companies and lead to either steady stock prices or appreciation. Business Week echoed similar sentiments in this article.
All-in-all, I’m a big fan of the Dow. You can’t find a more concentrated list of the world’s best companies that are more closely followed and easily invested in. In the revised edition of my stock market book, you can read about a way to leverage the Dow to twice its performance.
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