Trading Nation

Tom Lee has a plan to profit on the strange divergence he sees in the market

Fundstrat's Tom Lee on a curious market divergence

A weakening U.S. dollar is having a peculiar impact on stocks this year, specifically when it comes to the behavior of value and growth stocks, according to Tom Lee, founder and head of research at Fundstrat Global Advisors.

Since the mid-1990s, investors could practically "set their watch" to consistent relationships between value stocks, growth stocks and U.S. dollar strength, Lee wrote in a note to clients.

This relationship makes sense, as a weaker dollar is thought to benefit U.S. companies that export their goods or do business abroad (since each unit of foreign currency taken in will translate into more dollars). In addition, the dollar tends to rise when the U.S. economy is strengthening, and faster growth is more important for the economically sensitive value stocks.

But this year, he said, the relationship has all but unraveled.

When it came to buying value stocks in prior years, "it worked in almost every downturn in the dollar — and every time the dollar was strong, you wanted to be long growth. This year, we've had almost an 11 percent decline in the dollar, and growth stocks are massively outperforming value," Lee said Monday on CNBC's "Trading Nation."

So far this year, the greenback's value has tumbled more than 10 percent versus a basket of major currencies, and yet value stocks are underperforming. The S&P 500 value index is up 4.0 percent this year, while the S&P 500 growth index is up a whopping 17.5 percent.

This divergence between the dollar and the traditional growth-value relationship is likely to abate, Lee said; for that reason, he thinks that value stocks are a good pick now.

Specifically, Lee favors the value-heavy financials and energy sectors.

More broadly, the dollar's weakness has come amid an unusual macroeconomic backdrop for many different reasons. The dollar has slid in 2017 even as long-term interest rates and oil have both fallen as well, making this a "strange year" in Lee's view.

The full interview with Fundstrat's Tom Lee