Are US Stocks a Better Bet than Foreign Shares?

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.

CONTINUED : Safe Plays in a Turbulent Market

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