The rest of the world's economic pain could mean American gain as investors once again place their trust in the US stock market.
In a year when investors have increasingly shied away from companies that do most of their business domestically, a downturn in European and Asian economies coupled with a turnaround in the dollar looks to reverse that trend.
Some advisers are telling clients to rebalance their portfolios with an eye toward more US-centric companies and away from those with excessive international exposure at a time when foreign economies are weakening.
Analysts believe some of the economies that are in trouble are about to experience the sharp pangs of the housing downturn and credit crunch that the US economy already has suffered. A Merrill Lynch survey on Wednesday showed fund managers concerned about economic slowdowns around the world and favoring US assets for investment.
"In our client portfolios we shaved off a fair amount of international exposure by really the end of Q1 this year. It seems to be that the European economies are at least six months behind where we are," says David Twibell, president of wealth management for Denver-based Colorado Capital Bank. "The economies in Europe are in at least as bad a shape as we are, but they've taken no steps."
Twibell sees the rate-cutting strategy by the Federal Reserve mitigating some of the economic slowdown, with the dollar now having room to gain as the central bank prepares to raise its benchmark lending number, though not right away. European banks, conversely, have been more preoccupied with fighting inflation.
Commodity Boom Goes Bust
Twibell points out that American inflation was fed largely by surging commodity prices,which have backed off sharply since mid-July. As such, broad swaths of the economy, but particularly airlines and other fuel- and raw material-dependent industries, will benefit from the pullback.
The US is outperforming the rest of the world, one analyst says. Watch video.
"We're seeing rotation somewhat out of the commodity-related areas into other sectors of the market, which I think will bolster the market in general," Twibell says. "I think we might have a rolling-sector rotation within the market."
Like many other advisors, Twibell likes small-caps to play their traditional role and bring stocks out of bear territory.
He's putting some of his clients' money into the iShares Russell 1000 Value Index exchange-traded fund to capitalize on the move in small caps without exposure to particular stocks.
Also, Twibell is taking a look at individual stocks in community banks as well as playing an ETF, the KBW Regional Banking fund.
"The best strategy in a declining market is to have a more concentrated portfolio," Twibell says.
Safe Plays in a Turbulent Market
Biotech and Gold
Even as interest renews for the American companies, some are bracing for the violent swings that a bear market can bring.
Along those lines, safe plays in biotechnology and some of the most beaten-down parts of the market have drawn attention. John Carter, of Trade the Market, says he's unconvinced the switch to the US will last long but sees opportunity in the meantime.
"For the longer term not much has really changed," Carter says.
In the meantime, he likes the First Trust AMEX Biotechnology Index ETF, which tracks at least 90 percent of the stocks that comprise the index.
He also favors Goldcorp, which he thinks will rebound as the price of gold recovers from its steep tumble this year.
Beyond that, he's worried that some of the same specters that have haunted the markets all year--housing, banking, consumer weakness--will prevent a sustained rise in stocks until the damage is swept away.
"It's one of those things where people don't realize the repercussions of what's going on in housing. It's really something that's going to take years to get out of the system," Carter says. "Everybody's lived in such good times for so long that you kind of forget that things could stay bad for a while."
And there are some, like Peter J. Tanous, president of Lynx Advisory Group, who aren't changing much of anything in international exposure despite the recent swing in stocks, oil and the dollar and the weakness in other nations' economies.
"The fact that we have had growth has been largely helped by the strength of our exports. That in turn will be put in jeopardy if our trading partners experience a slowdown," Tanous says. "From an investment standpoint, it still doesn't take away from the principle of diversification. You should still diversify your investments internationally and still diversify your investments by risk."
As such, Tanous believes rebalancing should be done only across asset classes and not by geography.
"If your equity allocation is 50 percent US and 50 percent international then I don't see any reason to change that," he says. "If you want to start cherry-picking countries, hire a money manager who does that all day long."
What to Avoid
Multinational companies like McDonald's and CNBC-parent General Electric have been popular places to park money while US markets are in turmoil, but that may be unwinding as well.
Some analysts see weakening foreign currencies and slumping demand in Europe and Asia as threatening to companies that place a strong reliance on foreign sales for profitability.
"For about three quarters these multinationals might be under a lot of pressure. After that, there might possibly be a buying opportunity there," Michael Pento, of Delta Global Advisors, said on CNBC. "For the next three months I would avoid these companies, multinationals, like the plague."
But a resurgent US consumer, benefiting from a drop in gas prices, could lessen the damage.
"The strength and the resiliency of the US consumer and the benefit they get from even a small improvement in gasoline prices and an increase in purchasing power from the dollar strengthening will more than offset those declines from the large, liquid multinationals," Larry Glazer, of Mayflower Advisors, said.
Watch the heated debate between Pento and Glazer in the video at left.
But even if the multinationals falter, there is considerable belief that US equities are headed for an upturn.
"We've been trying to broaden our exposure to the market a little bit. It remains to be seen whether we've seen the bottom of the market or not, but my guess is we have," Colorado Capital's Twibell says. "If we can keep energy prices under control I think we will start to see at least some stabilization in the economy."