By John Wasik
CHICAGO May 21 What if, despite conventional
wisdom, the United States and Eurozone economies "decoupled?"
This suggests that no matter what happens in Greece, Spain and
the rest of the beleaguered European nations, the U.S. economy
wouldn't be linked to those woes and would continue its mild
recovery relatively unimpaired.
There's growing evidence to suggest that this has been
happening and may manifest itself more in coming months. That
means Europe and America could be more like two ships passing in
the night rather than on a collision course.
As most of Europe struggles with austerity programs,
political shifts and debt woes, U.S. stocks have generally been
staging a rebound. The MSCI All Country World Ex USA Index
finished April 2.5 percent below the level of October
2009, "when foreign stocks established their relative strength
peak against the U.S.," according to a May report from Leuthold
Weeden Institutional Research.
In contrast, the S&P 500 Index, a popular gauge for large
U.S. stocks, moved up 29 percent over that period. That suggests
Europe and the United States are not moving in lockstep.
Why the inverse relationship in a global economy in which
the fortunes of continents are often closely linked?
The U.S. economy is modestly rebounding while Europe muddles
through deleveraging. Stateside, industrial production, housing
starts and overall economic activity are up, according to recent
reports. Even housing starts were up almost 3 percent in April,
according to the U.S. Commerce Department.
Although this story is often buried when Europe and Facebook
Inc devour business headlines, the S&P 500 beat all but
eight countries in global performance measured by Leuthold
None of the countries that did better than the United States
were in Europe. They were Thailand, the Philippines, Colombia,
Indonesia, Chile, Sri Lanka, Malaysia and Korea - yet another
reason to hold emerging markets as a hedge against Western debt
One inverse proxy for U.S. economic health (and the dollar)
has been the price of gold. Since 2007, gold prices have
generally soared, acting as a fear index when U.S. economic news
has been sour. But over the past year, the SPDR Gold Trust
, an exchange-traded fund that tracks gold prices fairly
closely, was off about 17 percent from its 52-week high through
None of this means that the U.S-Europe decoupling will
continue or that the United States will remain on its recovery
course. Unemployment is still stubbornly high, and it will take
years before the housing market is back to normal.
Housing has typically been the truck that hauls the U.S.
economy out of slumps, but it's been sputtering in the wake of
the Great Recession. U.S. home prices were down 3.5 percent in
February from a year earlier, according to the S&P/Case-Shiller
20-city composite index, and are at their lowest point since
Foreclosures are slowing, but continue to depress prices.
Although foreclosures filings in April dipped to the lowest
level since 2007, according to the data firm RealtyTrac, the
company expects that number to rise to 6 million by 2014.
If you're a patient, long-term investor, there's no harm in
betting on an eventual European recovery, although there's
little optimism that it will happen soon. Many European-based
companies are global players that are still worth owning. For
example, the Vanguard MSCI Europe ETF holds power-houses
like Royal Dutch Shell, Nestle and Novartis
Your stronger position, barring any mammoth surprises, may
be a broad-based U.S. portfolio such as the iShares S&P 500 fund
Speaking of surprises, if you want to be cautious, your
biggest fear at this point should be U.S. political risk. The
White House and Republicans appear to be at loggerheads again
over spending cuts and tax increases. If the two major parties
begin playing a game of chicken over the U.S. debt ceiling
toward the end of the year - repeating last year's puerile
spitting match - U.S. stocks will get clobbered again.
No matter how the political rhetoric trends now, though,
it's sure to heat up as Congress faces down a "fiscal cliff" of
the expiration of the Bush-era tax rates and more than $1
trillion in automatic budget cuts.
If Congress does nothing by the end of the year, its
inaction may scorch the decoupling theory as the frail U.S.
economy could sink back into recession. If we were talking about
tango dancing, it would be the equivalent of one partner
slamming the other to the floor.