5/1/2007 – Worldwide economy is strong

The message from this quarter’s earning season is that despite a slowdown in the U.S. the worldwide economy is growing at a brisk pace. Many companies reported that strengthen in overseas operations overwhelmed weak domestic results. For example, Caterpillar earnings release highlighted: “Strength outside North America offsets the impact of significant weakness in U.S. housing and on-highway truck engines.” Synchronized global declines have tended to have global causes. Our slowdown is, of course, primarily related to our recession in the housing market. So as long as our housing recession is contained global growth should remain strong. 

These developments, along with a weak dollar, favor multinational companies with significant overseas exposure, and should act as a headwind for smaller companies who derive more profits domestically. Overall, S&P 500 companies obtain about 30% of their sales overseas compared with only 15% for companies in the Russell 2000. 

Importantly, investors should follow the global property market for signs of weakness. There is a chance the forces causing our recession could hit property markets overseas since the property boom was a global phenomenon. Recently the Spanish real estate market experienced a nasty sell-off that got scant attention in the U.S. but could be an important warning sign.