STOCKS

You can’t even begin to measure all the risk in global equities markets now. But you can reduce your exposure. The stocks that fit into these 3 themes should rise even if the global economy stalls.

The past month has reordered global risk and reward.

It’s not just that the S&P 500 fell 17.8% from its July 21 intraday high to the August 9 intraday low. Or that the German index, the DAX, is down nearly 25% in the past two months. Or that emerging markets such as Brazil and Shanghai spent time in actual bear-market territory.

But we’ve also seen Eurozone leaders unable to put an end to the euro debt crisis. We’ve seen the Standard & Poor’s credit rating of the United States go from AAA to AA+. (Fitch Ratings reaffirmed the US as AAA, again, on August 16.)

Japan has slipped back into recession. Inflation has topped official targets, and has been stubbornly resistant to central bank policies. Economic growth has slowed or threatened to slow in most of the world.

Trends that investors depended upon to value stocks—or to tell them where and when to chase momentum—are broken, damaged, or threatened.

Stocks are cheap in most of the world’s stock markets—if past trends reassert themselves after a short interruption. If the trends are truly broken, however, who knows?

What’s a Google (GOOG), or a Vale (VALE), or a Baidu (BIDU) worth if domestic and global rates of economic growth are about to drop by a percentage point or two—or more?

What’s Normal Now?
You have the option of stubbornly insisting that things are headed back to normal. Or that growth and stock prices will revert to the mean. But that begs the question of what normal is and where the mean might be.

Unless you’re willing to throw out the data on economic growth and performance of individual asset classes from the past decade (or more, I’d argue), it’s hard to come up with a long-term trend that can be convincingly projected a decade into the future.

And even then, your trend line would still have to come to terms with changes in global demographics and the global economy that, to me, indicate that the next decade will indeed be different.

To the degree I can, I prefer not to make investing a matter of faith or a gamble on alternatives with unknowable odds.

“To the degree I can” isn’t a very large measure right now. For example, I think the most likely range of US economic growth is somewhere between 1% and 2.5% for 2011 and 2012.

Doesn’t sound like much of a range? Just 1.5 percentage points? Certainly, but the swing is 150% from the minimum and 60% from the maximum.

And, of course, there’s no guarantee that the actual outcome will fall within that “most likely” range. (We've got some recent experience with results that fall into the narrow tail of improbable outcomes, but that nevertheless turned out to be very real.)

Global Economies Are More Unpredictable

Tickers Mentioned: Tickers: GOOG, VALE, BIDU, STO, WBK