Dollar Decline May Defy Prevailing Wisdom
U.S. INVESTORS STAYED on an even keel after last week's foiled terrorist attack. But they still face an imminent threat to their portfolios: a slowing economy at home and increased interest rates abroad.</br></br>In such an environment, the dollar often suffers. When that happens, strategists and money managers tend to counsel clients to favor shares of large companies. The idea is that because these companies tend to be multinationals that earn large chunks of revenue from operations outside the U.S., they are better positioned to weather weakness at home. Also, increased overseas interest rates support foreign currencies, making earnings abroad worth more when the income is "repatriated" into weaker dollars.</br></br>Trouble is, the recent track record for that advice isn't what it used to be.</br></br>"In the last 14 years, there's really been no advantage to moving to large-cap stocks" during times of dollar weakness, said Mike Thompson, research director at Thomson Financial, referring to companies with the biggest stock-market values.</br></br>The research firm compared the performance of the Standard & Poor's 500-stock index, made up mostly of big multinationals, with various European currencies. Sure enough, those big stocks performed better from 1976 to 1992, a time when the dollar was generally weak. That seemed logical: The stocks moved in the opposite direction of the dollar.