Why the U.S. Economy Doesn't Matter to Stocks
Ever since World War II, U.S. investors have seen their home stock market as the best and biggest in the world. Yet even though the U.S. economy still has its No. 1 status, there's an increasingly clear disconnect between economic activity and its impact on stocks of domestic companies.
Companies aren't countries
It's tempting to assume that what's good for a particular country's economy is good for the companies that operate in that country. After all, when economic activity picks up, people in that country have more money to spend, which boosts sales of the businesses that serve a nation's residents.
That's almost undoubtedly true for the small businesses that dominate the local economic landscape. With most local businesses relying on customers who live or work nearby and getting their products from local suppliers, the concept of the global economy doesn't necessarily have much bearing on their daily operations. A small business typically doesn't have the resources to abandon its home market and expand internationally.
But for large U.S. companies, the global economy has an increasingly important effect on both their business operations and on the fortunes of their shareholders. While the U.S. remains an important market for most of these businesses, it's no longer the dominant market -- and what's happening elsewhere can make or break a stock.
Where the business is
The fact is that even for companies that are considered American institutions, foreign sources of revenue have become essential for their continued growth and survival. Consider these companies:
% of Revenue From Outside U.S.
Ford (NYS: F)
Johnson & Johnson (NYS: JNJ)
Corning (NYS: GLW)
Caterpillar (NYS: CAT)
Source: Capital IQ, a division of Standard & Poor's. *Outside North America.
These well-known names get enough of their business from inside the U.S. for economic conditions to have a significant effect on their overall prospects. They're thought of as iconic U.S. companies. But they're not entirely dependent on a strong U.S. economy to profit.
More importantly, investors now routinely judge success or failure not based on a company's U.S. results but rather on their international business. For instance, Yum! Brands (NYS: YUM) has seen weak comparisons for its restaurant chains here in the U.S., but with such a huge emphasis on the growing Chinese market, it's far more crucial for the stock's health to see strong results in China than in the more mature U.S. market.
On one hand, the increased reliance of U.S. companies on foreign markets may seem like a loss of control for investors. No longer can the nation decide its own fate; rather, companies have exposure to foreign governments and populations with whom it's difficult for U.S. investors to identify.
But at the same time, having viable foreign markets to do business in frees up U.S. companies from the stresses of exclusively serving their home market. Perhaps the best example of this phenomenon is Philip Morris International (NYS: PM) , which spun off from its former parent Altria (NYS: MO) in order to focus exclusively on tobacco sales to foreign markets. By doing so, Philip Morris International doesn't have to worry about either U.S. regulation or the huge liabilities that U.S.-oriented tobacco companies have to deal with on a daily basis. Even though other companies haven't split off their foreign businesses so explicitly, they still benefit from the division of responsibility within their corporate structures.
Outside the border
It seems like a matter of time before China and other more populous nations become prosperous enough to dislodge the U.S. as the world's biggest economy. When that happens, you'll see plenty of pundits proclaiming the death of America and assuming that everyone's investments will go to hell in a handbasket.
But thriving emerging markets don't mean that your portfolio will automatically suffer. Companies that tap into the global trend should perform well, and if you position yourself to take advantage of this inevitable move, you should see your investments do quite well.
In fact, the hottest IPO of 2011 is relying on this trend to continue. Read more about it in this free special report from the Motley Fool.
At the time thisarticle was published Fool contributorDan Caplingerlooks forward to a truly global economy. You can follow him on Twitterhere. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Philip Morris International, Johnson & Johnson, Yum!, Ford, and Altria.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International, Johnson & Johnson, Ford, Yum!, and Corning, as well as creating a diagonal call position in Johnson & Johnson.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool'sdisclosure policymatters to you.
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