Europe is huge for economic output. All the nations in the European Union had total economic output of $17.6 trillion in 2011. The United States produced $15 trillion of goods and services in the same period.
Trade statistics can help us better understand how connected the EU and the United States really are. Statistics from the European Commission put the trade balance in perspective.
In 2011, Europe exported goods worth $314 billion, and services worth $153 billion to the United States.
In the same year, the United States exported goods worth $222 billion and services worth $157.4 to the European Union.
In terms of the total economic output of either geographic area, the amount of trade between the Atlantic Ocean is relatively small. European economic output is only marginally affected by its imports and exports to and from the United States. And the American economy is relatively removed from European debt problems.
The Real Issue
I think the most important thing to realize from the European Debt Crisis is that American companies are not immune from crisis, even if the whole economies of Europe and the United States have very little to lose.
Most American businesses are multi-nationals. Google, Microsoft, General Electric, and other “blue chip” stocks are all wholly-American businesses. Their headquarters are cemented firmly in US territory, and the bulk of their work is done right here at home.
But their profits are generated all around the world. These companies have revenues and costs in other nations, just as they have at home. So any slowdown abroad means that the earnings that come out in the United States are weighed down by a broad slowdown in foreign markets.
I’ve always thought investors spend too much time thinking about international exposure in a balanced portfolio. A balanced portfolio can come in a number of ways, and if you own something like an S&P 500 index fund, you probably have as much international exposure as you really need. The companies in an index like that are massive conglomerates – businesses that operate all around the world in various industries and geographies.
If there’s anything I want to focus on it is this:
- European trade is not all that important. The United States probably will not go into a recession because of a slowdown in Europe. However, any slowdown in Europe will lead to smaller corporate profits for American firms, and thus lower stock valuations. There is a very big difference between recession and stock market corrections – the stock market can drop without affecting your daily life. Recessions effect everything from your job to the prices you pay for goods and services.
- You probably already have enough international exposure. Throwing money after an international mutual fund or ETF might just be a headache worth avoiding. In all reality, any of the largest companies on the American stock markets are doing business in foreign developed markets, emerging markets, and even in frontier markets like South Africa or Turkey. You have plenty of international exposure, whether or not you own a fund that has “international” in the name.
- Business will become only more global. As time goes on, the largest companies on the stock market are going to grow fastest in places other than the United States. Look at companies like KFC – once named Kentucky Fried Chicken – which is growing in China, and shrinking in the United States. Or look to a firm like General Motors, which will lose money in Europe for the next decade or more, but is selling cars like toy stores sell Hot Wheels in China. Ten years from today, the largest American firms will make proportionally higher profits abroad than in the United States. So as time goes on, you’ll have more international exposure, something you should compensate for.
Those are the three main takeaways: stock market corrections are not recessions, international exposure doesn’t just come from an international ETF or mutual fund, and in time, the holdings that you have will become more and more heavily weighted towards international economies.
So while Europe grabs all the headlines, something productive might as well come of it.
Take a look at what you own and consider rebalancing your portfolio to account for the fact that you do have plenty of international exposure. If you hold US equities right now, you’re already feeling the consequences of a geographically diversified portfolio. Realize that, and consider cutting down on international stocks if you're heavily invested in American large caps.
Are you diversifying ahead of a crisis? What changes are you making?