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Let’s start off with the strength of the U.S. dollar. A high local currency means that imported goods are cheaper and exported goods become more expensive for buyers. That means that manufacturers or retailers that do business overseas will experience a tougher environment than companies that only operate in the U.S. – especially if they import goods from overseas as well. That’s good news for smaller companies since they generally have little to no international business dealings.
Foreign exchange risk is the other side of the same coin. International trade means currency exchange losses can occur when the currency is converted to U.S. dollars. Again, bad for large stocks and good for small ones.
If we look at last year though, we can clearly see how a strong dollar dominated all of 2015. So it would stand to reason that small-cap stocks would’ve outperformed – yet this is not the case.
The reason large-cap stocks did well last year has to do with several factors. One was a preference for risk. As the economic data began to look more and more unconvincing, investors sought the protection of larger, more stable companies.
The other reason is the Federal Reserve. It’s still unclear exactly how the rate hike (or rate hikes) are going to impact financial markets and whether it will be good or bad news for small-cap stocks. The extended environment of low energy prices and low interest rates has been a boon for all companies with the exception of energy stocks. Until further data is received, investors still aren’t sure if that’s been more beneficial for small-caps or large-caps.
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