Double trouble: What a strong dollar and rising oil prices mean to investors

Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management


Summary: The US dollar and oil prices are surging, creating a dual threat for global economies, companies, and consumers. How can investors prepare?

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Key Takeaways:

  • Morgan Stanley Wealth Management’s Global Investment Committee (GIC) believes a surging dollar could weigh on corporate profits, strain emerging economies, and weaken global consumer spending.
  • Rising oil prices could exacerbate these challenges globally and, in the US, add to households’ financial pressures.
  • Some investors are defensively positioning their investment portfolios, with an emphasis on quality stocks and medium-term bonds.

US markets are currently seeing an oddity that may prove challenging for global economies. The US dollar and oil prices, which historically have an inverse relationship, have both been surging.

  • The US Dollar Index, which tracks the value of the dollar against a basket of major world currencies, has risen to its highest level since November.
  • West Texas Intermediate, the main US oil benchmark, recently pierced the $95-per-barrel mark for the first time in about a year.

What could this mean for investment portfolios?

Considering the above—and keeping in mind that individual investors’ circumstances will vary based on their goals and risk tolerance—the GIC believes some investors may:

  • Stay defensively positioned and balance equity exposure in portfolios between offensive and defensive stocks, with a particular focus on quality.
  • Move toward medium-term bonds in fixed income, where historically high yields are emerging.

Some investors are also using losses on municipal bonds, preferred securities, or Treasuries to help offset capital gains elsewhere in portfolios for tax purposes, a process known as tax-loss harvesting.

What could this mean for global economies and US markets?

A stronger dollar and rising oil prices could have widespread impact across economies, industries, and consumers.

Here’s who could be affected the most:

  • U.S. exporters and multinationals: A stronger dollar typically makes US exports more expensive abroad, diminishing US exporters’ ability to compete on price. It also reduces US companies’ overseas earnings when they convert from local currencies into dollars. Approximately one-third of the profits of S&P 500 companies are exposed to these forces. On top of that, rising energy prices add cost pressures for US companies that are dependent on global supply chains and transportation as well as energy-intensive inputs like chemicals and plastics.
  • Emerging markets and other economies that import oil and depend on dollar-denominated debt: Crude oil has rallied more than 30% from this year’s low, generating higher costs for major energy importers—including Japan, India, South Korea, and Germany—that could adversely affect their economic growth. In addition, many economies, including in Asia and Latin America, have borrowed heavily in US dollars; when their currency weakens against the dollar, repaying those debts becomes more expensive. This dual blow to emerging markets and other economies could weigh on global economic growth and help create market volatility.
  • Global consumers: Outside of the US, a stronger dollar may limit demand for products made in the US as they become more expensive. Meanwhile, U.S. consumers will be coping with higher gasoline prices, which almost always translate into lower discretionary spending, in addition to existing pressures including depleted excess savings, swelling credit card balances, and the resumption of student loan repayments.

This economic and market uncertainty is likely to challenge corporate profits. Since analysts have been boosting their US corporate earnings forecasts for the past couple of months–now anticipating 12% annualized growth through 2025–these higher expectations, in the face of mounting risks, may amplify the degree of market volatility.

The bottom line:

A stronger US dollar could weigh on the economy, industries, and consumers. Rising oil prices could exacerbate those challenges.

The GIC believes some investors may balance equity exposure in portfolios and move toward intermediate duration for fixed income.

The source of this article, Double Trouble: A Strong Dollar and Rising Oil Prices, was originally published on October 4, 2023.

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