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Does Europe Still Matter to U.S. Stocks?


The week isn't even half-way done and we've already heard at least a quarter's worth of horror stories out of Europe:

* German industrial production unexpectedly unexpectedly fell in December as Europe's largest economy continues to whither.

* Greek workers are staging a strike in protest of the austerity measures European authorities are requiring prior to formalizing a long-delayed "make or break" debt write down.

* Retail sales in the UK slumped to their second worst January since 1995 when the country started tracking such data.

Six months ago, any two of the above would have sent global equities tumbling. In 2012 U.S. investors pretended to care by starting the day lower prior to sending the tape lazily higher on Monday and Tuesday. Crazy as it seems the question has to be asked: Does Europe as we know it (in a recession and keeping Greece on life support) still matter to U.S. Stocks?

Tim Speiss of EisnerAmper Wealth Planning LLC gives the natural answer: An emphatic YES. For starters he notes "the EU on a combined basis represents 20% of global GDP." That doesn't just have implications for the U.S. According the International Monetary Fund, via Speiss, China's ability to pull off an economic "soft-landing" relies on Europe stabilizing. The magnitude of China's exposure is such that the IMF offered China unsolicited advice on what the country should do to stimulate its economy in the likely event that the EU drag worsens.

What really scares Speiss as a wealth adviser, is his observation that the EU recovery will be hampered by the same demographic problem that will become acute in the U.S. over the next two decades: An economy dominated by the elderly and retired, draining resources from a decreasing base of workers.

"The spotlight is on Greece," notes Speiss, adding that the country represents less than one-half of a percent of global GDP. The diminutive Greek economy is the good news. The bad news is that if it takes the EU this long to deal with Greece, the failure of a larger economy in the remaining nations figures to utterly paralyze the entire continent.

It's an extensive list of horrors, including the fact that he thinks the ECB is exacerbating matters horribly through inaction. Regardless, Speiss still thinks there are companies that will emerge from the wreckage intact and possibly even thriving; just not in the financial sector.

The bottom line as Tim Speiss sees it is Europe not only matters but its still getting worse. The view from where I'm sitting is a European recession is priced into the tape, reducing developments over there to the loudest sound in a noisy room.

Unless it starts screaming lower, the EU playbook for dealing with an eroding Europe is already laid out: Buy U.S. stocks.

Are you ignoring Europe, staying out of stocks because of it, or watching it without letting Europe dictate your financial strategy? Let us know in the space below or drop me a Tweet @Jeffmacke