Nikkei Rally, But Pay Attention To Currency Exchange Rates

Today Japan announced an surprising boost to its quantitative easing program. The result was a significant jump in Japan's Nikkei 225 index closing up 4.83%. For some or many investors there is an awareness to QE programs seem to be positive for equity prices. Knowing this, ones instinct is to increase investment allocations to economies and markets where QE is being pursued. However, investor's must keep in mind the impact exchange rates will have on non-U.S. market returns when converting the non-dollar returns back to the U.S. Dollar. The recent Dollar strength, and likely a strengthening trend longer term, results in the Nikkei return in Dollars significantly trailing the S&P 500 returns. As the below chart shows, with the strong Nikkei performance today, the Nikkei return is now ahead of the S&P 500 Index (likely not the case after U.S. market open.) The blue line on the below chart shows the Nikkei return in Dollars.

From The Blog of HORAN Capital Advisors