Senin, 14 Oktober 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.

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