Are the Dow's Global Giants at Risk?

Are the Dow's Global Giants at Risk?

U.S. stock markets opened the morning fairly quietly today as investors await the minutes from the June meeting of the Federal Open Market Committee, where they hope to find clues as to what changes, if any, the Fed could make to its bond-purchasing program in the near future. As of 10:45 a.m. EDT, the Dow Jones Industrials were down 19 points, while the S&P 500 and the Nasdaq were also flat. Despite nervousness about what the Fed might say, U.S. investors seem to remain optimistic about the domestic economy's prospects, and today's economic releases show a big rise in sales at the wholesale level combined with a large drawdown in inventories, supporting the bullish thesis.

Increasingly, though, we've seen different stories from the U.S. versus international markets. In Europe today, stock markets were generally lower as investors reacted to the S&P downgrade of Italy's sovereign-debt rating to "BBB," the second-lowest investment-grade rating. Meanwhile, China's economy has suffered some troubling news recently. A 3.1% drop in exports surprised economists expecting a 4% rise and marked the emerging-market economy's worst export figure in nearly four years. Add that to yesterday's news that China's inflation rate rose to 2.7% in June, and it's uncertain that the country will be able to foster economic growth without stoking further price rises.

That disparity isn't necessarily playing itself out in share price movements today, but you can see the signs of its impact by looking at the moves global companies have made lately. Caterpillar has seen its stock struggle all year as the level of construction and infrastructure-building activity in China has been under pressure. But improving conditions in its domestic market show promise for the heavy-equipment maker, as homebuilders and contractors have been slow to replace equipment and therefore have pent-up demand.

Similarly, McDonald's has benefited from global growth for a long time, but lately it has turned its attention back to its U.S. customers. With the April launch of its Premium McWrap, McDonald's is trying to tap into the move among consumers toward healthier food offerings. Ironically, McDonald's was early in identifying the healthy-food trend when it started acquiring what would eventually become a majority stake in Chipotle Mexican Grill in the late 1990s. Chipotle has obviously gone on to great success by providing a limited menu of high-quality food items. Yet with McDonald's having spun off its stake in Chipotle in 2006, its success in the domestic market relies on its namesake restaurants, and trying to bolster U.S. growth is a natural consequence of sluggishness in other markets.

Clearly, some global companies are less dependent on relative economic conditions. ExxonMobil , for instance, relies on global energy prices for its profits, and those prices respond to the combined impact of global growth trends, regardless of which countries are growing and which aren't.

Investors should nevertheless keep their eyes on the entire global economy, rather than focusing simply on the U.S., as most of the Dow's components get a lot of their revenue and profits from overseas. If the disparity across national economies continues, then multinationals could well underperform more U.S.-centered stocks going forward.

To focus on the best prospects in the Dow, you need to consider not just global economic trends, but other factors as well. Learn more in The Motley Fool's special report "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free 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 Motley Fool has a disclosure policy.

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