Does a Weak Dollar Favor Large Capitalization Stocks?

When the dollar weakens, large capitalization U.S. firms may benefit from their international footprints, generating substantial revenues around the globe in local currencies and converting those revenues into an increased number of dollars on their income statements. Should investors therefore shift toward (away from) large capitalization stocks when the dollar weakens (strengthens)? To check, we compare the performance of the Dow Jones Industrial Average (DJIA) (representing internationally positioned, large capitalization stocks) and the Russell 2000 Index (representing small capitalization stocks) during and after the dollar trends against the euro. We focus on non-overlapping three-month measurement intervals to match corporate earnings release frequency. Using data for the stock indexes and the dollar-euro exchange rate over the period January 2000 through May 2011 (about 45 quarters), we find that: (more…)