How has the U.S. stock market performed when Europe was in recession?

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The latest conventional wisdom is that Europe is going into a recession and will drag the United States down with it.

I doubt that it's true.

We do not have a worldwide economy: We have a collection of nations and regions whose fortunes can diverge. Right now, things are getting worse in Europe, and better in the United States.

How can I say the U.S. economy is improving, when unemployment is still 9.0 percent? Here are a few points:

• Retail sales in October were more than $397 billion, a record.

• Gross domestic product stands at $13.3 trillion, a record.

• Jobless claims are running fewer than 400,000 a week. That compares with more than 600,000 a week in parts of 2009.

• Car and truck sales are running at an annual pace of 13.2 million units, which is decent, though not great.

• Home prices, as measured by the 20-city Case Shiller index, rose five months in a row in April through August (the latest month reported at this writing).

• The Conference Board's index of leading economic indicators, which does a pretty fair job of predicting the economy, has risen in 18 of the past 20 months, including each of the past six months.

Last weekend, I did a study of what happened in the U.S. stock market when major European countries were in recession. I noted six recessions in Germany (beginning in 1992, 1995, 2000, 2003, 2004 and 2008), three in France (starting in 1974, 1992 and 2008) and four in Italy (1982, 1992, 2004 and 2008).

I studied how the U.S. stock market performed during each European recession. For this purpose, I defined a recession as two or more consecutive quarters in which gross domestic product declined.

The 13 recessions varied in length from two quarters to six quarters. During eight of the 13 cases, the United States was not in recession. In five cases, it was.

In periods when Germany was in recession and the United States wasn't, the U.S. market (as measured by the Standard & Poor's 500 Index) gained an average of 12.5 percent.

When France was in recession and the United States wasn't, U.S. stocks gained an average of 29.7 percent.

When Italy was in a recession and the United States wasn't, U.S. stocks advanced 9.4 percent on average.

The results look different if you look at all 13 cases, including those when the United States was also in recession. Through that lens, the average result was a gain of 0.6 percent when Germany was in recession, 7.1 percent when France was and 3.0 percent when Italy was.

If the United States falls into recession, 2012 will be another tough year for stockholders. But if the United States continues to gain traction while Europe slips, history suggests we will see healthy gains in U.S. stocks.

Suppose you accept my optimistic thesis. What are a few U.S. stocks you should consider?

To answer that question, I looked for stocks whose earnings increased at least 20 percent in the latest 12 months, and at least 5 percent annually on average in the past five years. The stock had to sell for less than 15 times earnings, two times book value and two times revenue. And it had to have debt less than stockholders' equity.

Several dozen stocks met the criteria, suggesting that now is a fertile time for stock picking.

Among them are a batch of energy stocks, including Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Halliburton Co. (HAL), National Oilwell Varco Inc. (NOV) and Devon Energy Co. (DVN).

Several health-care stocks qualify, among them Pfizer Inc. (PFE), Merck & Co. (MRK), Medtronic Inc. (MDT) and Healthspring Inc. (HS).

Some industrial and materials stocks that look good are Dow Chemical Co. (DOW), Norfolk Southern Corp. (NSC), the Mosaic Co. (MOS), Illinois Tool Works Inc. (ITW) and Air Products and Chemicals Inc. (APD).

Among technology companies, Intel Corp. (INTC) passed the screen, as did KLA-Tencor Corp. (KLAC). Entertainment giants Walt Disney Co. (DIS) and Viacom Inc. (VIA/B) also met the tests.

To invest at a time like the present takes courage. In the past 11 years, the average return from the stock market has been less than 1 percent a year. So far, 2011 is a down year. But I strongly believe that the long-term rate of return on stocks — about 10 percent a year — is still the norm, and that we will return to it.

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