As the thinking goes, this economic version of American exceptionalism should redound to the benefit of domestic stocks with limited exposure to weak foreign markets.
 
But as the U.S. bull market begins to sputter a bit after last year’s strong climb, some are rightly questioning this jingoism.
 
Writing for the Website of Pension Partners, a money management firm that focuses on asset allocation, research director Charlie Bilello takes on the idea that “the U.S. is strong and is an island onto itself.”
 
To be sure, the U.S. stock market has been besting its global peers over the past half decade. “Five years of outperformance is a long time and enough to build a strong case for just about anything,” concedes Bilello.
 
That aside, the economic warning signs for the U.S. is existing alongside the recent news that the U.S. economy grew at a 5% clip in the third quarter amid falling unemployment.
 
He is troubled by falling inflation expectations and a flattening yield curve, which can be signs of economic trouble.
 
Also, “like Europe and Japan, U.S. long duration yields have plummeted over the past year. The 30-year Treasury yield is at a new all-time low, below the crisis lows of 2008,” Bilello writes. “Credit spreads in the U.S. are widening,” he adds, “with the high yield index showing a 542 basis point spread, up from 388 basis points one year ago and 335 basis points last June.”
 
He also notes that within the U.S. stock market, it is not the cyclical (or economically sensitive) sectors but defensive sectors such as Utilities, Health Care, and Consumer Staples that have been outpacing the Standard & Poor’s 500 since the beginning of 2014. Clearly, Mr. Market isn’t rewarding stocks primed for an economic surge.
 
“Collectively, these factors suggest that the U.S. is not immune to a global slowdown,” Bilello concludes, adding that his firm’s asset-allocation strategies “remain defensively positioned.”
Meanwhile, Jim O’Neill, the former chairman of Goldman Sachs Asset Management and a columnist with Bloomberg View, is openly questioning whether “the U.S. economy can keep its balance.”     

“On the one hand, if the dollar were to strengthen in 2015 as it did in 2014, there’d be a boost to consumer demand from higher real incomes, and this would support the recovery,” he writes. “On the other, the diminished competitiveness of U.S. producers in domestic and foreign markets would probably cancel out the benefit. Exports would fall and imports would rise. It’s quite likely — contrary to some short-term forecasts — that the combination of cheap oil and a strong dollar will be more helpful to Japan and the euro area than to the United States.”
 
O’Neill writes that if he were a Federal Reserve governor, he would be concerned enough by these conditions to wonder whether the dollar’s strength “in effect, an unplanned tightening of U.S. monetary policy -- should make me want to postpone the first post-crash rise in short-term interest rates.”
 
Doug Kass, the president of hedge-fund shop Seabreeze Partners Management and a ubiquitous market pundit, is also wondering about the supposed moat that keeps the U.S. insulated from economic problems in Europe and Asia.
 
“The notion that the U.S. will be an ‘oasis of prosperity’ seems an unlikely outcome in a networked, interconnected and flat world,” he writes in a blog post appearing on Yahoo! Finance. “Commodities, currencies, interest rates and our capital markets are linked together to the degree never seen in history.”
As a result, Kass is playing defense and erring “on the side of conservatism as the potential for a market correction looms. I continue to favor above-average cash positions.”
 
In a useful piece for Morningstar, Christine Benz, the site’s director of personal finance, took a look at what some of the best “go anywhere” fund managers are doing with their money. She looked at Morningstar medal-winning global asset allocation funds managed by the likes of BlackRock and GMO, the Boston-based company headed by Jeremy Grantham.
 
What she learned is that many funds are pushing up their weighting to cash and underweighting U.S. stocks, which they view as overvalued. “The fact that many of the medalist world-allocation funds employ valuation-conscious strategies has also contributed to fairly light stakes in U.S. equities as they’ve rallied,” she writes.
 
So much for American exceptionalism in the markets.