2022 was the Year of the U.S. dollar. The greenback was one of the strongest currencies in the world for almost the entire year. The euro, the British pound, and the Japanese yen were all pushed to multi-decade lows against the mighty dollar in 2022.
Every party must eventually end, though. The dollar's celebration was abruptly halted when the October consumer price index measured inflation at an annual rate of 7.7% on November 10 (arrow). The dollar responded by falling sharply, and breaking a bullish trendline that had been intact for most of the year.
Chart Source: TradeStation
A lower CPI means we can expect less hawkishness from the Fed in 2023. Treasury bond yields and mortgage rates, which climbed sharply in late 2022, should begin to stabilize.
That's the good news. The bad news is, in 2023 we are likely to see the first non-pandemic related recession since 2009.
JPMorgan Chase (JPM) CEO Jamie Dimon indicated that a recession is likely in the coming year. Tesla (TSLA) CEO Elon Musk has expressed similar sentiments. FedEx (FDX) CEO Raj Subramaniam warned of an imminent global recession. According to NPR, most top business leaders are anticipating a downturn in 2023.
We have already seen mass layoffs in the tech sector, particularly at Meta Platforms (META) , Amazon (AMZN) , and Twitter. Even non-tech names like Disney (DIS) have announced a freeze on hiring.
In a recession, we want to own consumer staples. These products are necessities that consumers will purchase regardless of the state of the economy. They include diapers, toothpaste, soap, deodorant, detergent, paper towels, and personal grooming items.
In a weak-dollar scenario, we want to own U.S. companies that earn a substantial portion of their income overseas. As the dollar falls, the euro and other foreign currencies rise. U.S.-based companies that earn revenue in strong currencies receive a favorable exchange rate when those currencies are then translated into weaker U.S. dollars.
Ideally, we'd like the best of both worlds in one trade. One name that fits this description is Procter & Gamble (PG) .
By mid-November, P&G stock was down 13.8% year-to-date. However, the stock was trending higher then, and recently broke above a bearish trendline that had been intact for six months (shaded yellow) and ended 2022 down only 5.0%.
Chart Source: TradeStation
The Cincinnati-based giant makes a wide selection of popular products, like Pampers diapers and Tide detergent. According to Statistica, 51% of Procter & Gamble's revenue comes from outside the U.S., which means a falling U.S. dollar should act as a tailwind for earnings.
At the same time, a weakening economy in 2023 won't dissuade consumers from purchasing P&G products, since the goods it manufactures will be purchased regardless of the state of the economy.
By offering consumer staples and protection against dollar weakness, Procter & Gamble provides investors with the best of both worlds. That's why I'm expecting the stock to outperform the major indexes in 2023.