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Market Commentary

February 25, 2015

Scott L. Wren, Senior Global Equity Strategist

Weekly update on current stock market action

  • The effects of currency movements on earnings, both positive and negative, are nearly always less than many investors anticipate due to active exposure management by companies.

What it may mean for investors

  • We think investors should not avoid exposure to companies selling goods and services internationally over fears that a stronger U.S. dollar will crimp profits to a meaningful degree.

Currency Crutch

Earnings reporting season can bring out the best, or the worst, in companies. When economic growth is modest and competition is fierce, some businesses rise to the occasion while others flounder and limp along waiting for better times to return. The current recovery’s growth rate has paled in comparison to most other cycles over the last 40 years and challenged companies big and small to buckle down and do what is necessary to survive and profit.

Around this time last year we commented on numerous occasions about how a good number of companies were blaming the extreme winter weather for any woes they were experiencing. Sales below expectations? Must be the weather. The bad weather certainly had at least some effect on our nation’s output of goods and services as the economy actually contracted by a touch over two percent in the first quarter of 2014. But in terms of overall earnings during that same time frame, the S&P 500 posted a reasonable 5.4 percent year-over-year growth rate, so somebody must have been doing something right.

In the 30 years this strategist has been watching the stock market, it seems a scapegoat must be found from time to time on which to lay blame for worse-than-expected performance. As we work through the last portion of the fourth-quarter earnings reporting season, one thing is clear: the scapegoat this time around is a stronger dollar. Remember, as the dollar strengthens, it takes more units of foreign currency to equal one dollar. So when 30 percent to 40 percent of revenues for companies in the S&P 500 come from overseas in the form of non-dollar currencies, the impact can be meaningful.

But companies with foreign-exchange exposure do not live in a vacuum. They do not just hope currency movements won’t negatively affect profits. Most companies in the S&P 500 do a meaningful amount of business overseas and actively manage their foreign-exchange exposures. Currencies are frequently bought or sold on a forward basis in anticipation of incoming revenues or outgoing expenses. Forward currency rates are taken into account when pricing goods or submitting bids. Many of these companies actually have currency desks manned by a team of professionals whose sole purpose is to make sure the company is focused on selling their products, not speculating in the foreign exchange markets.

The financial media always seem to overestimate the impact of currency movements. When the dollar strengthens, the media can endlessly dwell on the negative impacts and potential headwinds (U.S. goods become "more expensive" overseas). When the dollar is falling in value, the opposite occurs, and the media tend to focus on the tailwinds and benefits of a weaker dollar (our goods become "cheaper" overseas).

But the truth is, the net effect is almost always of far less magnitude than the worst (or best) case scenario because of active currency exposure management at the company level. A stronger dollar can negatively impact earnings, but during this reporting season, it appears to have become more of a crutch to explain businesses' less-than-stellar execution.

Scott WrenAbout Scott Wren

Scott Wren is a senior global equity strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Wren produces strategy and guidance recommendations for global equities. With his knowledge of the financial markets, he is often quoted in national media outlets including Reuters, The Chicago Tribune, The Los Angeles Times, The Washington Post, The Associated Press, and The Wall Street Journal. He has appeared in interviews on CNBC, Bloomberg TV, Fox Business News, and Nightly Business Report. Prior to joining Wells Fargo Advisors predecessor A.G. Edwards in 1998, Mr. Wren worked as a senior foreign exchange dealer for The Boatmen’s National Bank of St. Louis. He began his career on the trading floor of the Chicago Mercantile Exchange and has more than 25 years of experience in financial services.

He received a Bachelor of Science in Business Administration from the University of Kansas and a Master of Finance from Saint Louis University. He is located in St. Louis, Missouri.

*As of Sept. 30, 2014

Risk Factors

Past performance is no guarantee of future results.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.

An index is unmanaged and unavailable for direct investment.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market. The Index is unmanaged and not available for direct investment.


Global Investment Strategy ("GIS") is a division of Wells Fargo Investment Institute, Inc. ("WFII"). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the GIS division of WFII. Opinions represent GIS' opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including you existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

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