Recently U.S. data has taken a more positive tone as international data continues to get softer. Thursday’s U.S. data brought a very strong number on jobless claims, along with two regional manufacturing surveys that were better than expected. Industrial production numbers were weak, but on balance more data beat estimates than missed, and that’s been the pattern for the last few months. Meanwhile Europe continues to deteriorate and the numerical trends are worrisome. At this point it would seem a European recession is a foregone conclusion, and the only question left to argue about is whether the recession will be mild, average or severe. In Asia things are cooling fast as well, and many leading indices are falling. The positive spin is that the emerging world is now cutting rates; on the other hand, they are not cutting them fast enough, nor with sufficient magnitude. Overall the international data is far weaker than that of the U.S., which makes for a mixed and confusing landscape.
Most investors who take a constructive view on markets appear to believe the U.S. is still in good shape and (at worst) will muddle through, regardless of those pesky problems in Europe or Asia. They look at the positive coincident numbers and think they should continue to support earnings and the stock market. Ultimately bullish investors are buying into the view that the U.S. can decouple from other parts of the globe.
While I would like to believe this, I continue to think that decoupling is a thesis fraught with risk. The world is more global than ever and the problems in Europe have already begun to infect Asian growth. Though the U.S. has clearly been more resilient than I predicted for the past quarter or so, Europe’s problems will eventually seep into the U.S. economy. The tough part about betting against decoupling is trying to time with precision when one economy’s weakness will feed into another. Back in 2007/2008, the theory of decoupling was in the air and helped emerging markets stocks and commodities outperform the U.S. markets for a quarter or two before they succumbed to the gravity of global economic deterioration. If history is rhyming then investors should relish these good numbers, while realizing that it won’t be long before the great decoupling myth fizzles yet again.
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