STOCKS

If the US market has you stumped, take a close look at Mexico and Canada. Some key stocks in those nations could gain whether the US economy perks up or not, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

The crosscurrents in this market are enough to give you a headache.

May I suggest that you take two stock markets—those of Mexico and Canada—and call me in the morning?

The Baffling US Market
If you look only at the US stock market, you see a confusing mix of short-term strength and long-term weakness. And you are left wondering, day to day, which one investors will choose to emphasize.

On the strength side, the US economy is growing faster than any other economy in the developed world. The year-to-year growth of 2.8% in the fourth quarter looks great when you compare it with a stagnant Japan and a Europe that’s headed toward a recession this year.

But on the weakness side, as Standard & Poor’s reminded investors Wednesday, the United States still hasn’t begun to deal with either its current budget deficit or the long-term trends feeding that deficit.

The credit-rating company, which downgraded the United States to AA+ from AAA on August 5, warned that the United States faces a one-in-three chance of another downgrade within the next six to 24 months.

Strength side again—the Dow Jones Industrial Average is flirting with its May 2008 high, and is within a 10% rally of its all-time high of 14,164.53 set on October 9, 2007—when Lehman Brothers still existed and the government didn’t own a piece of either General Motors (GM) or American International Group (AIG).

Weakness? The US dollar, which looked strong just a month ago, has fallen to a three-month low. Since its peak on January 13, the dollar had tumbled 3.7%, as of February 8 against a basket of currencies that includes the euro, the yen, the pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

So Run for the Borders
Now, I’m not going to suggest that putting your money—or some of your money, anyway—into Canadian and Mexican stocks is going to eliminate this conflict, or the risk that goes with it.

But I would suggest that buying Canadian and Mexican stocks right now is a good way to get most of the good effects of US economic growth while avoiding the bad effects of a falling dollar. In fact, if the dollar continues to slide, you might even pick up some extra gains from the appreciation of the Canadian loonie and the Mexican peso.

See whether this strategy makes sense to you:

The Mexican and Canadian economies are closely linked to the US economy, and about 74% of the exports from those countries go to the United States. During the US recession, that wasn’t a good thing. Canadian exports of autos and auto parts fell, for example, as did Mexican exports of cement, for another example.

With a strengthening of the US economy, however, that trend has reversed.

But Mexican and Canadian monetary policy and interest rates aren’t pegged to the actions of the US Federal Reserve. The Reserve Bank of Canada is one of the few central banks in the developed economies that has not marched down the road of further interest-rate cuts. The bank has had a 1% benchmark interest rate in place since September 2010.

(Remember that the Fed has set its benchmark rate at 0% to 0.25% until the end of 2014. The European Central Bank kept its benchmark rate at 1% at its February 9 meeting, after cutting rates by 0.25 percentage points in November and December. But with the Eurozone slipping into recession, the pressure will be on the bank to cut rates in the year ahead, rather than raise them.)

Similarly, the Mexican central bank, the Bank of Mexico, has been among the most reluctant central banks in the developing economies to push down its currency to promote exports.

In fact, in the bank’s last major currency intervention in November, it acted to support the peso, which had tumbled as a result of the Euro debt crisis. That’s a huge contrast to countries such as Brazil, where the central bank has intervened to hold down the price of its currency.

Neither Canada nor Mexico is contemplating anything like a new round of quantitative easing—something the US Federal Reserve is still studying—which would add hundreds of billions of dollars to the money supply.

All of that has helped the two currencies rank among the best-performing currencies in the world so far this year. The Mexican peso is up 10% against the dollar in 2012, and 8% against the euro. The Canadian dollar hasn’t been quite as strong, but it still ranks in the Top 10.

NEXT: How to Buy into Mexico

Tickers Mentioned: Tickers: POT, AGU, FINGF, CAT, SCCO