You may be bored hearing about the Fed. You may question the notion that we have to factor its actions into our stock thinking.
But one thing is for certain: Ever since a June rate hike came back on the table, which happened on or around May 10 -- at least in terms of the collective consciousness of the stock market -- the dollar's gotten stronger against all currencies. The result?
Remarkable underperformance from the stocks of companies that benefit from a weaker dollar and had been doing quite well on a fundamental basis.
The two obvious ones? McDonald's (MCD), which had roared to $131 May 10, has plummeted to $123, and PepsiCo (PEP), which had gotten to $106 and has fallen to $100.
Let me just say from the outset, I think both of these stocks are buys. McDonald's has the best same-store sales it has had in years, and I believe CEO Steve Easterbrook has only just begun the transformation. I know many of the critics circling are saying the one-trick of all-day breakfast has run its course. First, I don't even agree with that. This whole initiative has been discounted again and again, but I think there's still legs to the story. Second, the franchisees are only just now starting to catch on to the turn and are just beginning to staff the stores with more people and accept that there's definitely something big happening that they have to buy into.
But McDonald's has a gigantic international presence -- only 33% is domestic -- and it's been socked ever since the Fed narrative changed.
While PepsiCo has also been hurt by the potential for a 3-cent soda tax in Philadelphia, it's the strong dollar that's the threat. Forty-five percent of PepsiCo's sales are overseas.
Both companies have bountiful dividends and it is instructive to point out that the declines seem to have been stopped by their yields; both near 3%. Still, a weaker dollar is key to estimates going higher in the second half of the year.
Who else has been hurt?
3M (MMM) reported a fantastic quarter not that long ago and the stock had taken off. It had stood at $169 before we heard that June was back on the table for a rate hike, and then fell to $164 on no real news other than the dollar's strength. Thirty-three percent of the earnings here are from overseas.
Some of the not-as-strong stories have also been shelled. Kimberly-Clark (KMB) has seen its share go from $128 to $125. Estee Lauder (EL), a company with a gigantic overseas presence but did not report a strong quarter last month, has fallen from $95 to $90 since May 10. The stock of Alphabet (GOOGL) fell from $739 to $718, again on nothing new at all. Only 46% of its revenues come from this country. (PepsiCo and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
We know a rate hike would be good for the banks. In fact, they need multiple rate hikes to get to more robust earnings. But the Financial Select Sector Fund (XLF), the ETF that encompasses the financials, hasn't budged at all.
In other words, the stocks of the international companies are getting hurt even as the supposed rate hike winners, the banks, are getting no lift.
That's why this market's become so hard. The stronger dollar hurts a huge number of companies while even the natural winners gain nothing. That's why these Fed speakers with their talk of two to three rate hikes matter. They are driving the dollar up, exactly the opposite of what our international companies need in order to see their stocks rally in the second half of the year.