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Real Questions from Real Subscribers

Q: How will the strong dollar affect the earnings of companies on the Buy List, and what percentage of the Buy List’s earnings is exposed to the effects of the dollar’s strength?

A: Dear Subscriber,

The effects of the strong dollar are nearly impossible to calculate in advance, and we have no estimate about the percentage it will trim from our Buy List’s earnings. However, nothing about the dollar’s move has changed our opinions about individual stocks.

If the dollar remains strong, earnings growth for multinationals will probably slow, unless the strength persists long enough for quarterly results to lap earlier periods of similar strength in the dollar. We don’t expect the Buy List to be affected any more than the broad market. In the last fiscal year, stocks currently on our Buy List generated 24% of their revenue in foreign countries, below the S&P 500 Index’s 30%. Barring the sale of stocks en masse — which we don’t recommend — investors can do little to offset any profit fallout. Here are a couple reasons why investors shouldn’t worry too much about the dollar:

1) Currency values tend to fluctuate. The dollar may very well weaken in the year ahead, which would have a different effect on corporate earnings.

2) Given time, financial markets adapt to change. If the dollar remains strong, after a while U.S. corporations and the analysts who follow them will reach an equilibrium. Remember, while the pace of earnings growth always matters, in our view, a company’s growth relative to expectations has a greater effect on the stock price in the near term.

We rarely adjust our investment strategy to react to economic changes. Since we tend to hold stocks regardless of conditions, we don’t sell stocks in response to a strong dollar, any more than we’d plow more money into the market simply because the dollar was weak.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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