Early in January 2012, DoubleLine Capital's Jeffrey Gundlach sounded bearish on the U.S. stock market.
He said unless the Shanghai Composite Index stages some kind of rally, it is unlikely that the U.S. stock market can decouple for long and perform well in 2012.
Now in mid February, the Chinese stock index is up over 6 percent year-to-date, offering a glimmer of hope for U.S. equities, although it still substantially underperformed the S&P 500 in the last 12 months (down 17 percent versus up 1 percent).
The Shanghai Index is arguably a leading indicator of the S&P 500, or at least it has a high correlation to it.
The SSE peaked at the same time as the S&P 500 Index in October 2007 and bottomed in October 2008 before the S&P 500's bottom in March 2009.
Starting in September 2011, however, the SSE began drifting downwards while the S&P 500 went on to rally. This downward movement of the SSE, therefore, potentially signals an eventual fall in the S&P 500.
Chart of the S&P 500 versus the SSE Composite Index, producing using Microsoft Excel
Looking at the SSE-S&P 500 relationship from an economic perspective, one can rationalize that it would be difficult for the U.S. economy to decouple from the disappointing performance of an economy as connected, large and important as China's.
There are several explanations as to why the U.S. stock market has temporarily performed well so far in 2012 and not tracked Chinese stocks lower.
One reason could be that in the beginning of each calendar year, institutional investors have a tendency to put their cash to work and buy financial assets.
Another reason could be a flight to safety move that has investors switching out of emerging market and European financial assets into U.S. financial assets.
In 2012, the world economy and financial market are not yet healthy, according to Gundlach.
In the developed world, he sees a twin tower of risk, namely debt and high unemployment in the U.S. and debt, weakness in the banking sector and high unemployment in Europe. These problems remain unresolved, said Gundlach.
While heightened uncertainty, as previously stated, may support U.S. financial assets (and therefore trigger a rally in the U.S. stock market in the short-term), it ultimately does not bode well for risky financial assets like U.S. stocks.
Gundlach said in the long run, emerging market stocks have better fundamentals (e.g. economic growth, government balance sheet) than U.S. stocks. However, global uncertainty may make these assets prone to wild swings in prices in the short-term.
Another long-term play (but also potentially subject to short-term pains) Gundlach recommended was natural gas, which investors can get exposure to by buying natural gas MLPs.