Two Charts to Debunk Decoupling Once and for All
It’s Friday and you know what that means… it’s time to go to the charts!
You’ll recall that at the end of each week, I try to let some graphics do the talking. As they say, a picture is worth a thousand words.
This week we’re setting our sights on an investing myth that needs to finally be debunked once and for all.
Back in 2008, when it was obvious the United States was headed for a slowdown, decoupling – the theory that the rest of the world (particularly emerging economies) could keep growing undeterred – became an overnight buzzword.
What’s worse, investors bought into the junk science. They stuffed their portfolios with international and emerging markets stocks with the belief that it would allow them to escape the inevitable bloodbath in the United States.
Well… not so much.
While the S&P 500 Index slumped 38.5% in 2008, 30 countries witnessed drops of 50% or more.
Even more telling, the poster children for the decoupling trade – Brazil (-41.2%), Russia (-72.4%), India (-52.45%) and China (-65.39%) – didn’t escape punishment, either, despite wild predictions that they would.
Clearly, when one major economy in the world sneezes others catch a cold (or worse).
So why bring this up today? Because as I revealed on Wednesday, all eyes remain fixated on the debt crisis in the eurozone. And it’s important to remember that there are no silver bullet investments to escape the potential fallout.
We’re in this global economic mess together. And this chart proves it…
As you can see, economic growth in all regions of the world is closely correlated. Particularly over the last decade. So a slowdown anywhere promises to have ripple effects everywhere.
The price action in U.S. bank stocks in relation to European bank stocks only underscores the connectedness.
In the last year, the correlations between U.S. banks and European banks spiked. Remember, correlations range from -1 to 1, with one meaning that the two investments move in lockstep with each other. And we’re getting pretty darn close to that reality.
In terms of investing implications, let me reiterate my recommendation from two weeks ago – load up on reliable, dividend-paying stocks. And do so before it’s too late.
Bottom line: Globalization – an undeniable, decades old, economic force – created one quantum entanglement. Decoupling was supposed to upend all those connections. But it’s proven to be nothing more than junk science. So if the eurozone slows down, look out! The rest of the world will feel it.
That’s all for this week. But before you sign off, do me a favor. Let me know what you think about this column or any of our work at Wall Street Daily. All you have to do is send an email to firstname.lastname@example.org or post a comment below.
Thanks and enjoy the weekend!
Ahead of the tape,