U.S. Dollar Hits 19-Month High: 5 Top Domestic Picks

The U.S. dollar is currently hovering around a 19-month high. A robust U.S. economy has compelled the Fed to adopt a hawkish stance policy with the strong likelihood of a fourth rate hike this year in December. At the same time, U.S. products are losing competitiveness in the international market due to a strong dollar.

Moreover, weaker-than-expected economic data from China and the European Union and concerns about emerging markets’ ability to service their external debt have raised the possibility of global slowdown. Consequently, it will be prudent to invest in domestic business-focused stocks with a favorable Zacks Rank.

US Dollar Index Hits 19-Month High

On Dec 14, the ICE (NYSE:ICE) U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, touched 97.71, its highest level since May, 2017.

Demand for the dollar intensified after the Fed signaled a possible rate hike in December amid fears of a global economic slowdown. Moreover, geopolitical conflicts in the UK and Italy resulted in decline in the value of the pound and the euro compared with the U.S. dollar.

Tepid Economic Outlook for China and Eurozone

A series of weak economic reports, recently released by the Chinese authorities and several countries of the European Union have raised serious questions about an impending economic slowdown in these countries.

On Dec 14, National Bureau of Statistics of China reported that industrial output grew 5.4% year over year in November, its slowest pace in almost three years. Chinese retail sales rose 8.1% year over year in November, marking its weakest growth rate since 2003. Most of the economists think lingering trade related conflicts with the United States is the primary reason for slow pace of economic growth in China.

Meanwhile, the European Central Bank (ECB) has lowered its growth forecast for the European Union (EU) for both 2018 and 2019. The new growth rate of 2018 is now projected at 1.9% compared with 2% forecasted earlier. Similarly, 2019 growth rate is now pegged at 1.8%, down from 1.9% projected earlier. Notably, this is the second time in the past three months that the ECB has lowered growth forecast for the EU.

Concerns Relating to Emerging Markets

Emerging markets are characterized as major borrowers of international debts (external commercial borrowing). Since the debts have to be repaid in dollar terms, servicing these debts while managing fiscal discipline becomes difficult for these countries.

Moreover, refinancing of debts, which are on the verge of maturity, becomes problematic owing to soaring interest costs. With the dollar continuing to surge, heavy debt servicing liabilities may lead to economic slowdown in emerging markets resulting in global economic slump.

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Why Domestic Stocks?

Investors are concerned that a rising dollar will hurt sales of U.S. multinational companies as their products will be more expensive in the international markets. Notably, in 2017, S&P 500 companies had derived 43.6% of their total revenues from international markets. Domestic business oriented companies are mostly immune to any external shocks since the United States is the lone market for their products. This will help them to outperform the broader market defying extreme volatility.

Our Top Picks

At this juncture, investment in domestic business-focused stocks will be fruitful. We have narrowed down our search to five such stocks each having a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see Original post

Written By: Zacks Investment Research