Dollar Rises on the Back of Euro Collapse | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review:  Dollar Rises on the Back of Euro Collapse

CANFIELD, Ohio — The British pound and the euro currency both tumbled against the US dollar this past week as political upheaval in the UK and fears of global recession sent shockwaves through financial markets.

The euro crashed to a 20-year low around €1.02 to the dollar as it headed towards parity with the US currency.

The dollar is widely seen as a safe haven in times of economic trouble, and has soared against currencies around the world as fears of recession mount.

Going forward, the strong dollar is likely to begin making it more difficult for U.S.-based multinational companies that derive a significant portion of their sales overseas. A strong dollar makes U.S. products more expensive to foreign buyers.

If the strong dollar begins to negatively impact forward-looking earnings estimates for U.S. companies, further stock market volatility is likely as we move through the second half of 2022.

Featured Insight:  Anything Can Happen

I like to talk about risk management a lot because at the end of the day, good investment management is in fact good risk management.

It is important to remember when managing an investment portfolio that pretty much anything is possible; don’t get in the trap of thinking that something could never happen.

Some investors will expose themselves to a substantial amount of risk by taking a large position because they think a certain outcome is impossible.

Usually, it’s an entirely different risk that you couldn’t see coming that ultimately comes back to bite you.

It reminds me of a story about a gambler who lost regularly. One day he hears about a race with only one horse in it, so he bets his life savings. Halfway around the track, the horse jumped over the fence and ran away.

Always remember that there’s no such thing as a “sure thing”.

Looking Ahead: Earnings Season on Deck

Earnings reporting season for second quarter financial results will begin next week with the large banks first out of the gate.

Given the substantial decline in stock prices during the first half of 2022, it has been surprising that we have seen only modest downward revisions in earnings estimates for the second half of the year

As I have stated many times previously, it will be far more important to keep an eye on what companies say about their earnings outlook for the next two quarters than what their headline report is for the second quarter, which is already in the past.

If earnings guidance for the third and fourth quarter holds up relatively well, we could be in for a substantial recovery in the equity market. However, if analysts are forced to cut their forward earnings estimates by a meaningful magnitude, investors are likely to be faced with more volatility in the coming weeks.

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