The Dow Has Ridden U.S. Strength Higher, but Will Europe Bring the Bull Market Down?

While the U.S. economy looks increasingly strong, Europe is still in a heap of trouble.

Jun 24, 2014 at 1:30PM
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Judging by the minimal moves in the Dow Jones Industrial Average (DJINDICES:^DJI) today, it's no surprise that Tuesday has been a relatively quiet day for the global markets generally. Given the strength in the U.S. economy, having the Dow near record highs is consistent with the overall mood of the market. Yet even as the FTSE 100 (FTSEINDICES:^FTSE) and Germany's DAX (DAXINDICES:^DAX) are near their own all-time record highs, signs of difficulty in the European economy could eventually weigh on international investors -- as well as Boeing (NYSE:BA), Ford (NYSE:F), and other U.S. multinationals that have a substantial presence on the continent.

Ford Genk Sign
Source: Ford.

How's the European economy faring?
Most of the attention that Europe has gotten recently has centered on merger and acquisition activity, as many U.S. companies have sought European acquisition targets in order to take advantage of favorable international tax laws. When you look more closely at the European economy, though, you'll see that it hasn't been as successful as the U.S. economy in recovering from the financial crisis.

Eiffel

Source: Wikimedia Commons.

So far this week, economic data hasn't been kind to the eurozone. Yesterday, a key index of purchasing managers' activity proved weaker than expected, dropping for the second month in a row and raising concerns that the fragile recovery could be in danger. Specifically, Germany has done fairly well in fostering growth, but France continues to see recessionary conditions. Even in Germany, though, companies are uncertain about their futures, with this morning's release of business-climate perceptions showing a drop from last month and signaling companies' pessimism about their immediate prospects.

From a policy standpoint, economic weakness has put central banks on the offensive. The Bank of England's chief argued that U.K. employment conditions aren't strong enough to justify raising interest rates, pulling back on more hawkish sentiment from the recent past. Meanwhile, the European Central Bank has suggested that interest rates could stay low through the end of 2016 -- much longer than most investors expect from the Federal Reserve and its future plans for U.S. monetary policy.

Why Europe matters
Dow Jones Industrials investors might wonder how Europe really affects them. After all, many foreign investors have put money into the U.S. market to avoid such problems, thereby arguably supporting the Dow's gains.

Yet the global nature of both the 30 Dow components and other large multinationals makes them vulnerable to a greater or lesser degree to European weakness. Boeing doesn't have the home-field advantage that rival Airbus has in Europe, but it nevertheless makes substantial sales to airlines in the eurozone. Poor economic conditions could lead to reduced aircraft demand. Similarly, Ford has worked hard to turn its struggling European operations around for years, and it has had reasonable success in cutting losses there. But if buyers in Europe can't afford new vehicles, then it could send the automaker's European operations lower as well.

The Dow Jones Industrials can benefit from weakness in other markets under certain conditions. But the stock market is truly global now, and so in the long run, the Dow will do better if it has a strong European economy that its component companies can use to find profit opportunities across the Atlantic.

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Dan Caplinger owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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