With rate cuts on the horizon, history suggests that international equities and commodities may outperform.
For the last few years, Americans traveling overseas have benefited from a relatively strong dollar, which made visiting other countries somewhat less expensive. However, a strong dollar has significant implications not just for the cost of dinner in Rome or tickets to the Louvre, but for investing strategy as well.
Although many factors can affect the value of the U.S. dollar, one of the most important is the level of interest rates set by the Fed. The dollar’s strength peaked in September 2022, then slipped in value, but traded rangebound for much of 2023. Notably, the greenback started to fall again in October of 2023 as expectations rose that the Federal Reserve may begin to cut interest rates, a possibility later confirmed in December.
A weaker dollar has historically benefited two main asset classes: international equities and commodities. A weaker dollar translates into better opportunities for international companies to sell their products in the U.S., which in turn can be reflected in their stock price and better performance in international markets. Commodities are typically priced in dollars, so a weaker dollar often leads to lower commodity prices. This triggers more demand as foreign buyers can purchase more of the commodity with their own currency.
Over the last 25 years there have been seven instances the dollar fell by at least 10%. As the chart below illustrates, international equities outperformed their domestic counterparts six of the seven times, although U.S. equities also showed positive performance. Meanwhile, commodities outperformed domestic equities four of the seven times.
Asset Class Performance During Dollar Declines
| 7/5/2001 | 12/30/2004 | -33.4% | 6% | 33% | 25% | 50% |
| 11/16/2005 | 4/22/2008 | -22.7% | 17% | 46% | 15% | 43% |
| 3/9/2009 | 11/25/2009 | -16.6% | 67% | 81% | 9% | 31% |
| 6/7/2010 | 4/29/2011 | -17.5% | 32% | 39% | 4% | 44% |
| 12/28/2016 | 1/25/2018 | -13.5% | 29% | 33% | 3% | 4% |
| 3/20/2020 | 5/25/2021 | -12.8% | 85% | 75% | 5% | 50% |
| 9/27/2022 | 7/13/2023 | -12.6% | 25% | 33% | 5% | -2% |
| Average | 37% | 48% | 9% | 31% | ||
Past performance does not guarantee future results. Data 12/31/2000-12/31/2023
In general, the typical U.S. investor tends to have very little – if any – allocation to international equities. There is a name for the phenomenon of investors’ wariness about investing in overseas companies: home country bias.
To be sure, home country bias has worked well for investors in recent years, when the strength of the U.S. economy and vibrant businesses led to strong U.S. equity performance. And certainly no one is suggesting abandoning domestic equities. But as we enter a potentially weaker dollar environment that could benefit international equities, investors should ask themselves if they should adjust their portfolios.
There are three key advantages to international investing:
- Access to world class international companies. U.S.-only investors risk missing out on opportunities in non-U.S. firms in areas such as semiconductors, pharmaceuticals, automakers and energy.
- Potential diversification. Some argue that in a globalized world, U.S. and international equities are subject to the same economic or geopolitical developments and are closely connected. However, the historical evidence of asset class performance during weak dollar periods shown above illustrates the potential benefits of international diversification, which may help produce better risk adjusted returns.
- Potential income. Like their U.S. counterparts, many international companies pay out dividends to their shareholders. Adding international dividend payers can help enhance a potential income stream for investors in the U.S.
In short, this could be a good time for investors to consider adjusting their asset allocation and adding more international and commodity exposure to their portfolios.
Related funds:
IDVO: Amplify International Enhanced Dividend Income ETF
ISWN: Amplify BlackSwan ISWN ETF (International)
NDIV: Amplify Natural Resources Dividend Income ETF
EMFQ: Amplify Emerging Markets FinTech ETF
Index definitions:
The U.S. Dollar is represented by the U.S. Dollar Index (DXY), which is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.
US Equities are represented by the S&P 500 Total Return Index, which is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.
International Equities are represented by the MSCI World ex-USA Total Return Index, which captures large and mid-cap representation across Developed Markets (DM) countries excluding the United States.
Fixed Income is represented by the Bloomberg US Agg Total Return Index, which measures the investment grade, U.S. dollar denominated, fixed rate taxable bond market.
Commodities are represented by the Bloomberg Commodity Total Return Index is a benchmark for commodity investments.
Investments in foreign securities involve greater volatility and political, economic, and currency risks and differences in accounting methods.