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Investors are ignoring the strong dollar at their peril

Greenback to remain firm into 2016, but investors don’t seem concerned about effects

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A strong dollar is denting earnings at companies with significant overseas exposure.

The dollar is on a hot streak, a resounding vote of confidence in the U.S. economy. But for U.S. corporations that rely on foreign sales, a firmer currency is a headache that won’t go away and most investors are being much too complacent, according to the world’s largest asset manager.

“Going into 2016, a stronger dollar and the advent of a tightening cycle, even a gentle one, could impede both U.S. earnings growth and multiple expansion,” warned Russ Koesterich, BlackRock Global Chief Investment Strategist, in a blog post earlier this week. “For now, however, based on last week’s U.S. stock market performance, investors appear to be overlooking this fact.”

The S&P 500 SPX, -0.98% is on a six-week winning streak after surging 8.3% in October, its best monthly performance in four years.

The ICE U.S. Dollar index DXY, +0.05% a measure of the buck’s strength against a basket of six currencies, has remained in a upward trajectory since the middle of 2011. The index rose more than 2% this week, propelled by expectations that the Federal Reserve could raise interest rates as early as December.

U.S. corporations, meanwhile, are painfully aware of the adverse impact of a firm dollar. Goldman Sachs economists reviewed transcripts of conference calls from 44 companies and concluded that the continued strength of the greenback is among the themes most often discussed this quarter, along with divergence between consumer and industrials sectors, inflation, and buybacks.

“The strong U.S. dollar continues to be a drag on top- and bottom-line results, particularly for companies with significant international exposure. Managements generally expect the foreign exchange headwinds to persist into 2016,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a report.

Blended earnings — reported earnings and estimates — for S&P 500 companies so far in the third quarter fell 2.2%. For companies that generate more than 50% of sales within the U.S., earnings rose 4.8%; for companies that report more than 50% of sales overseas, earnings fell 10.6%, said John Butters, senior earnings analyst at FactSet.

Inflation emerged as another point of worry for companies in the consumer staples sector. Chipotle Mexican Grill Inc. CMG, -0.51% PepsiCo Inc. PEP, -0.84%Costco Wholesale Corp. COST, -1.52% and FedEx Corp. FDX, -1.13% all referred to rising labor costs in their earnings calls, according to Goldman Sachs.

McDonald’s Corp. MCD, -0.34% went as far as to state that wage increases hurt third-quarter margins by about 400 basis points.

The U.S. economy added 271,000 jobs and the unemployment rate fell to 5% in October, the lowest level since April 2008, the federal government announced Friday morning. Hourly wages also jumped 9 cents to $25.20, the fastest year-on-year rise since July 2009.

The positive news from the job market has boosted the odds of a December rate hike to above 70%, according to the CME Group’s FedWatch tool.

“What is happening today is that investors for the first time in months are thinking that there is a risk that the complacency on the Fed rates path needs to be re-examined,” said Steven Englander, global head of G10 FX Strategy at CitiFX.

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