Tariffs, Defense, and the Dollar: What's Moving Overseas Stocks on Presidents Day

As Presidents Day approaches, investors are keeping a close eye on the interplay between tariffs, defense spending, and the U.S. dollar, as these factors significantly impact overseas stock markets. The ongoing conflict in Ukraine, coupled with escalating tensions in Asia and the Middle East, has led to a surge in defense spending, with global military expenditure reaching $2443 billion in 2023, a 6.8% increase from the previous year (SIPRI Fact Sheet, 2023). This increase has been driven by the Russia-Ukraine conflict and escalating tensions in various regions, including Europe, Asia and Oceania, and the Middle East. As a result, defense stocks in countries involved in these conflicts or with significant defense industries, such as the United States, Russia, and European nations, may experience increased investor interest and higher stock prices.

The U.S. dollar's strength or weakness can significantly impact the performance of overseas stocks. A stronger dollar makes imports cheaper for U.S. consumers and businesses, reducing the cost of goods and services. This can lead to increased consumer spending and corporate profits, potentially boosting the performance of U.S. stocks. Conversely, a weaker dollar makes imports more expensive, which can negatively impact U.S. companies that rely heavily on imported goods and services. However, for overseas stocks, a stronger dollar can make their products more expensive for foreign buyers, reducing demand and market share abroad. This can directly impact corporate earnings and stock valuations. For example, a 10% strengthening of the U.S. dollar against the Japanese yen would reduce the value of Japanese earnings for U.S. companies by approximately 10% (Goldman Sachs Research, 2024).

Investors can adapt their portfolios to mitigate the impact of currency fluctuations on overseas stocks. Currency-hedged ETFs can help maintain international exposure while minimizing the effect of exchange rate movements on returns. Additionally, investors might consider increasing their allocation to companies with predominantly domestic revenue streams, as these businesses are naturally hedged against currency fluctuations. Sectors that have historically demonstrated resilience during periods of dollar strength include utilities, telecommunications, and real estate investment trusts (REITs), which generate most of their revenue domestically (Goldman Sachs Research, 2024).