The U.S. dollar maintained a strong rally since the beginning of the second quarter. The currency has strengthened against its key counterparts after accelerating wage growth and stellar job additions in August bolstered expectations of a quarter point rate hike as early as this month.
Small caps, having domestic focus, are better poised to weather a stronger U.S. dollar. This category of stocks is ripping fresh records as they are cushioned against the loss of competitiveness and currency translation impact of a stronger greenback. Needless to say that as the dollar rises multi-nationals lose their competitive advantage, as foreign customers see U.S. goods as more expensive than non-U.S. goods.
Worker Wages Surge to 9-Year High
August’s jobs report made a pretty picture of the economy with opportunities for almost everyone. The United States added 223,000 jobs last month, exceeding analysts’ estimates. Such a feat was achieved despite questions about employers’ ability to find skilled labor.
Employment gains, meanwhile, was reduced by a combined 50,000 for the month of June and July. But, the economy has been able to produce an average of 207,000 new jobs per month so far this year, faster than the hiring spree in both 2016 and 2017.
The jobless rate remained at an 18-year low of 3.9%, indicating that the nine-year stretch of economic expansion has scope to continue. However, the biggest news in the August employment report was a sharp rise in paychecks. The average wage paid to American workers increased by 10 cents to $27.16 an hour. To top it, the yearly pay rate climbed to 2.9% from 2.7%, the highest since the end of the Great Recession.
Wage Data Backs Expectation of More Rate Hikes
Strong August jobs data, especially rise in wages, could put more upward pressure on rising inflation. As a matter of fact, the Fed’s prolonged accommodative measure helped the economy gain traction, leading to the present high levels of inflation.
However, now the Fed is widely expected to raise more rates to keep the economy from overheating. Traders are expecting the central bank to hike rates by a quarter point to 2.00-2.25% at its Sep 25-26 meeting. If this happens, the Fed will be raising rates for the third time this year. Traders are, in fact, pricing in a 76% chance of another quarter-point hike at its Dec 18-19 meeting, according the CME Group’s FedWatch program.
Fed Chairman Jerome Powell, by the way, has already defended the central bank’s push to raise interest rates at a gradual pace despite President Trump’s criticism of higher borrowing costs. Powell said that gradual rate hikes seem appropriate as inflation has recently moved close to the Fed’s desired 2% (read more: 5 Top Stocks to Gain as Powell Backs Gradual Rate Hikes).
Rate Hike Prospects Buoy Dollar
The ICE U.S. Dollar Index, which measures dollar’s strength against a basket of major currencies, has been above the psychologically key 3% level since the beginning of April. It has gained 3.6% so far this year and is poised for a weekly rise of 0.3%.
After all, prospects of rise in federal funds rate result in a strengthening of the U.S. dollar. The greenback continued to rise as currency traders tend to be drawn toward such currencies where interest rates are attractive.
What Does a Stronger Dollar Mean for Stocks?
A rising dollar impedes earnings growth, which suggests that returns from the equity market might be subdued. Particularly, companies that derive a lion’s share of their earnings from overseas will be dealt the biggest blow. Such companies are exposed to foreign exchange risks between the United States and other countries they are operating in. Thus, if dollar gains strength, it tends to dent foreign sales of such companies.
The S&P Global added that with every 1% rise in the greenback, large-cap companies with heavier U.S. concentration in terms of revenue generation have gained 71 basis points on average. For small caps, the correlation was way better. In fact, small caps have outperformed large caps so far this year. One of the popular measures of small caps, the Russell 2000 Index, has risen 8% year to date, while the broader S&P 500 has gained 6.5%.
5 Winning Stocks
Small caps are set to benefit from wider domestic revenue exposure, which insulates them from the effects of a stronger dollar. Thus, investing in stocks with high domestic exposure in terms of revenue generation seems judicious. We have picked five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). Such stocks also have a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Riverview Bancorp, Inc. RVSB operates as the holding company for Riverview Community Bank that provides community banking services. The company operates through a network of 19 branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, Vancouver, and Longview, WA; and Portland, Gresham, Tualatin, and Aumsville, OR. The company has a Zacks Rank #2 and VGM Score of B. In the past 60 days, one earnings estimate has moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased 10.8% in the same period. The company’s projected growth rate for the current year is 35.9%, while the Financial - Savings and Loan industry is expected to rise 21%.
BG Staffing, Inc. BGSF provides temporary staffing services in the United States. The company has a Zacks Rank #2 and VGM Score of B. In the past 60 days, two earnings estimates have moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased 19.9% in the same period. The company’s projected growth rate for the current year is 61.4%, while the Staffing Firms industry is expected to rise 10.9%.
Natural Grocers by Vitamin Cottage, Inc. NGVC retails natural and organic groceries, and dietary supplements in the United States. The company has a Zacks Rank #2 and VGM Score of A. In the past 60 days, one earnings estimate has moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased 32% in the same period. The company’s projected growth rate for the current year is 6.5%, while the Food - Natural Foods Products industry is expected to decline 2.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Summer Infant, Inc. SUMR designs, markets, and distributes branded juvenile health, safety, and wellness products primarily in the United States. The company has a Zacks Rank #1 and VGM Score of A. In the past 60 days, one earnings estimate has moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased 50% in the same period. The company’s projected growth rate for the current year is 114.3%, while the Consumer Products - Discretionary industry is expected to rise 4.8%.
Hallmark Financial Services, Inc. HALL, through its subsidiaries, underwrites, markets, distributes and services property/casualty insurance products to businesses and individuals in the United States. The company has a Zacks Rank #1 and VGM Score of A. In the past 60 days, one earnings estimate has moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has increased 10.7% in the same period. The company’s projected growth rate for the current quarter is 322.2%, while the Insurance - Property and Casualty industry is expected to rise 75.1%.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
