Monday, October 14, 2013

Even Europe is recovering

The chart above is worth a thousand words, at least, but here's a quick summary. Note 1) the strong correlation between equity prices in the U.S. and in the Eurozone over the past two decades; 2) the huge degree (over 50%) by which U.S. equities have outperformed their Eurozone counterparts since 2009; and 3) the fact that Eurozone equities are still 46% below their 2000 highs, whereas U.S. equities are 10% above their 2000 highs. In short, the Eurozone economy has followed pretty closely the direction of the U.S. economy, but in the process has fallen way behind.

This may be changing.

The above chart is the ratio of the S&P 500 index to the Euro Stoxx index. The U.S. equity market clearly led the Eurozone by leaps and bounds from 2009 through mid-2012, with much of the "credit" likely going to the PIIGS sovereign debt crisis. But for the past year or so the Eurozone appears to be holding its own and even pulling ahead, as reflected in the declining ratio.

The relative improvement in the Eurozone economy has been showing up for most of the past year in the manufacturing and service sector purchasing manager surveys, as seen in the above charts. Europe suffered a two-year recession which has recently come to an end. Even though Eurozone growth still lags the U.S. significantly, the Eurozone is doing somewhat better on the margin, and better than expected.

Caveat: I'm not predicting that Eurozone stocks will continue to outperform U.S. stocks, as they have recently. My main point is simply that it appears that the Eurozone is no longer the laggard that it has been for so many years. That's good news for Europe, and it's good news for the U.S. as well, since a stronger Europe bolsters the outlook for global growth, and that is good for almost everyone.


Benjamin said...

I hope Europe can rebound, but strangled by an unaccountable central bank, I do not see how they can, also given their levels of taxes and regulations.

China has a growth-orinted central bank, a point usually forgotten when everyone gushes about mainland China. (The gushing is getting muted however. Something is up).

Japan is fascinating; we will have to see how Abenomics works out. They need to print money until the sewers are stuffed with yen.

The Fed is still too timid.

I see more slow growth ahead. Globally with maybe an exception for China and the Far East.

Perry Stearns said...

Mr Grannis: I just stumbled upon your site. It would make interesting podcasts if you and some of your favorite commenters could go back and review some of your articles together and compare what you thought might happen when you wrote the article, and they commented on it, with some future article upon the same, or similar subject, perhaps written at some pivotal juncture when possible. Wish I had more time to read all these articles and think about how things panned out. Thanks for keeping them available.

Frozen in the North said...


Europe is recovering! Greece is negotiating its third bailout. Actually a good question how is it the France's borrowing costs are 30 bps lower than the US Federal government.

Yes, America is a mess and Congress is playing a game of chicken, but France has not had a budget surplus in 40 years, its deficit is still very large (and not 4% of GDP like in the US) what the hell is going on?

Hans said...
This comment has been removed by the author.
Hans said...

Frozen, what many pundits are disregarding is the MASSIVE explosion in World government debt...

Look at Euroland as they will spend several trillion to save not only their economies but their banking system as well...

Floating debt is so easy, it is like welfare money and most of the Central bankers will support this scheme because it is easy and quick..

In the near future, there will be a price to pay for such folly...