The co-author of our new book, From Bear to Bull with ETFs, second and revised edition, is Talley Léger. In his most recent MVR Portfolio Strategy missive, Talley asked a critical question:
Why do US share prices display little sensitivity to US dollar fluctuations across time? The fair-value equation for the stock market is expressed by (1) earnings per share (EPS) and (2) the price-to-earnings (P/E) multiple. In strong-dollar regimes, slower earnings growth (read: foreign sales/exports, negative translation effects, and decreased competitiveness) is usually offset by multiple expansions (read: lower inflation, borrowing costs, and discount rates).
While we wouldn’t overstate the importance of the US dollar vis-à-vis the S&P 500, it does matter for sector positioning! The relative performance of US defensives is directly related to the US dollar (read: high domestic exposure), whereas the relative performance of US cyclicals is inversely related to the US dollar (read: high foreign exposure).
Here is the link to Talley’s full research piece: http://www.cumber.com/content/special/MVR_PSP_050215.pdf.
On page 9 of Talley’s piece, readers will find the correlation coefficients of US stock market sectors vs. USD periods of strength and weakness. The three strongest sectors when the dollar is strengthening are Financials, Utilities, and Consumer Discretionary. Cumberland’s US ETF portfolios are currently overweight in all three. We particularly like the financials as does Talley’s statistical work. Note that we are underweight energy and materials. About half the US portfolio delves into industry and sector choices; the other half uses more broad based ETFs.
Note that Talley Léger is a subadvisor to Cumberland on our sector rotation model. He authored the middle section of From Bear to Bull with ETFs, on the sectors. We thank Talley for permission to share his research note with our readers.
About The Author
Images: Flickr (licence details)
About the Author
David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a masters in philosophy from the University of Pennsylvania.
Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a participant in Bloomberg radio programs. He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. He co-authored the book Invest in Europe Now!
Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series, and organized a five-continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, Prague, Capetown, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen Award from GIC for his efforts.
Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), serves on the Research Advisory Board of BCA Research, and is also a member of the Philadelphia Council for Business Economics (PCBE).
Mr. Kotok has served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.
Mr. Kotok hosts an annual Maine fishing trip, where, it is rumored, most of the nation’s important financial and economic decisions are actually made.