An American Dollar in Paris

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Happy Thursday, FWIW readers!

You might have heard some gasps of amazement this week, and not just from people watching thermometer readings in the UK. With earnings season in full swing, investors saw enough good news to turn a few market indicators green for the first time in a while. All three U.S. stock indexes (that’s the S&P, Nasdaq, and Dow) logged their biggest gains in nearly a month, with some even mentioning the term “July rally.” As you know, FWIW loves to embrace optimism, but there are still signs that this roller coaster ride is not coming to a halt.

A key factor in driving so much financial turbulence is all the conflicting data that investors are juggling. Economic output is down and inflation is up, yet the jobless rate is down with salaries staying strong. And the same rings true in the latest earnings reports. Take the big banks, which are sending more mixed signals than a high school crush. Citibank and Goldman Sachs exceeded revenue expectations while JP Morgan and Morgan Stanley fell short.

With this lack of clarity, you are hearing phrases like “better-than-expected” more often. Earnings reports this week from Netflix, which didn’t lose as many subscribers as forecast, and Tesla, which beat revenue expectations but fell short of production targets (and took a hit when selling some of their crypto assets), are examples of this. While cheering these small wins, investors are also listening closely for signs of hiring slowdowns and other cutbacks across all sectors. The economy isn’t out of the woods yet and market stability seems far off.

As faithful FWIW readers know, we are midway through “earnings season” (don’t worry, our list of terms to listen for in quarterly earnings reports is a good refresher) and, as more reports are released, watch for updates on how companies are progressing toward all of their stated goals, including those on issues you prioritize (e.g. sustainability metrics like NetZero targets, or governance items like stock buybacks). For those of you keeping score at home, we’ve logged mentions of “ESG” in several Q2 earnings call transcripts, including IBM, Novartis, and Prologis.

Finally, Americans (at least Americans planning on vacationing in Europe this summer) received one more bit of good news this week: the value of the US dollar and Euro are now just about equal (at least something has hit parity.) We’ve got the DL on what that means for you, so keep scrolling to our deep dive below.

News you can use

• Yum Brands, the owner of fast food chains like Taco Bell, KFC, and Pizza Hut, says 42% of its global leadership roles were held by women last year. It’s one of several companies that is working to reach 50% by 2030 with the “Paradigm for Parity” movement. Other items that caught our eye in their latest sustainability report include a net-zero emission target for 2050 and a pledge to transition to 100% cage-free eggs across at least 25,000 restaurants by 2026.
• We love green partnerships! An Appalachian shale gas producer is working with a biotech startup that produces Aircarbon, a biodegradable material that replaces plastic. CNX Resources has signed a deal to deliver some of the methane it captures in its coal mines to Newlight Technologies, which counts Nike and Shake Shack among its clients, to fuel its production of the biomaterial. You can read more about the need to plug methane leaks (and mask cows) here.
• Nuclear fusion startup TAE Technologies has raised another $250 million from the likes of Google and Chevron, bringing the company’s total funding infusion (haha) to $1.2 billion. Nuclear fusion energy is widely considered the safer, cleaner alternative to nuclear fission energy, and TAE plans to have a first-of-its-kind reactor connected to the electrical grid by the early 2030s.

What a mighty dollar means for your money

You may find yourself reading the news this week and practicing saying, “Combien ça coûte?” or “Quanto costa?” That’s because for the first time in 20 years, the US dollar and the euro — the official currency in most of the European Union — are close to parity. As this exchange rate chart shows, one euro is just about worth one dollar, a noteworthy development given that the euro was much more powerful for the majority of the time since its launch in 1999.

There’s one very obvious benefit to this: Americans are getting more bang for their buck while enjoying all those beaches, cafes, cobbled streets, and museums that keep popping up in our social feeds. The Wall Street Journal points out the favorable exchange rate doesn’t apply to flights to your destination, because those are priced in dollars, but can make things like hotels, restaurants, and souvenirs more reasonable than last year. Imported goods, like that designer bag you’ve been eyeing, are also cheaper.

But it’s not just the euro. The US Dollar Index (DXY, sometimes called the “Dixie”), which measures the strength of the greenback against a basket of other currencies like the Japanese yen and Canadian dollar, is up a steep 11% this year and reached its highest level since 2002 this month. The dollar has been gaining dominance broadly, and it doesn’t look like this rally is ending any time soon.

What’s Going On?

Globally investors are chasing the dollar these days and, therefore, driving up its value, because the stable currency is considered a “safe haven” asset to buy and hold with a looming recession. Yes, it’s hard to imagine that, with US inflation at 9.1%, the dollar is “safe”, but it’s true. The reasons are complicated, but it mainly has to do with the dollar’s status as the world’s favorite medium of exchange, central bank reserve currency, and the relative weakness of the EU economy, particularly in light of the impacts of the Ukraine war (like the EU calling for gas rationing). The allure of the dollar is supplemented at this time by the Federal Reserve’s interest rate raising campaign, which makes US Treasuries more tempting to yield-seeking investors. Note: Today’s announcement of an interest rate increase by the EU central bank could impact this.

What Does This Mean?

Although it’s a boon for American travelers (yes, Emily’s salary in Paris would go farther this season), a strong dollar hurts the many US companies with large international operations because their overseas sales translate to fewer US dollars. In addition, any goods that are imported into the US get more expensive and less competitive. For instance, this week IBM said its annual revenue could take a $3.5 billion hit due to foreign exchange rates. Some other firms that have reported a dent in their finances for the same reason include Coca-Cola, Microsoft, Salesforce, and Costco.

What You Need to Know

Since US companies with high international revenue exposure are seeing their earnings affected, their stocks could underperform and drag the broader market lower. In the investing world, this is known as currency risk.

Goldman Sachs recently raised concerns about the impact of currency risk on the revenue of a number of companies with a high percentage of foreign sales. They noted that tech companies like Apple (AAPL), along with advertising platforms like those run by Meta and Alphabet (GOOGL), have significant international exposure, while sectors like health care, financial services, and utilities were less likely to be impacted.

Returns from international mutual funds and ETFs can also be negatively affected by a stronger dollar since holdings are owned in foreign currencies. Emerging market funds can struggle in such a situation as well.

What Can You Do?

If you’re investing with long-term goals in mind, you don’t need to do anything dramatic in response to the dollar’s short-term movements and some profits being shaved. It’s also risky to become a foreign exchange trader overnight and start buying euros with the hope they’ll rise up soon again.

But this is a good opportunity to learn more about diversifying your portfolio and to talk with your advisor about it. Besides your well-known, large-cap stocks, you can research adding some small and mid-sized US companies to your investments, which are less likely to be affected by foreign exchange rates. For sustainable investors there are ESG options available, like the iShares ESG Screened S&P Mid-Cap ETF (XJH) and SPDR S&P SmallCap 600 ESG ETF (ESIX).

Before you go -

To “raise” awareness about rising sea levels for the people of Copenhagen, a Danish broadcaster raised the height of some of the benches. Definitely eye-catching!

** FWIW team members own shares of Alphabet, Apple, Citibank, Coca-Cola, Goldman Sachs, Google, IBM, Microsoft, Salesforce, and Tesla — and probably have watched more episodes of “Emily in Paris” than they would admit.