Thursday, September 24, 2009

The Dollar-Adjusted Stock Market: The Effect of Weak Currency Headwinds

The U.S. stock market has rallied sharply off its March lows. Sometimes, however, we forget that stocks--like other assets--are denominated in currency units. Those currencies change value, as do other asset classes.

When we look at the S&P 500 Index (chart above) denominated in the U.S. dollar index--a basket of international currencies--we see that the recent bull run has only retraced a modest portion of the massive decline from 2007.

An international investor who has owned U.S. stocks has seen gains in equities eroded by losses in the U.S. dollar. Similarly, holders of U.S. debt find themselves being repaid in cheaper dollars. It is difficult to imagine U.S. assets finding relative strength on a global basis when those assets are facing weak dollar headwinds.