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 Weeden.
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 dramas.
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 May 18.
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 late 2002.
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.