It’s almost as if we’ve been watching a magician use sleight of hand to fool us.
For more than a year now, we’ve been led to believe that the strengthening U.S. economy was pulling the all-but moribund world economy forward, while the European economy was a deadweight holding the world back.
Not so much, it turns out.
U.S. economic data is increasingly lackluster while European economic data is improving to such a degree that the numbers reported in places such as Germany, Spain, the U.K., Portugal and elsewhere are surprising the prognosticators.
It’s a trend I first told you to expect early last year, and it’s a trend that will continue for several more years and ultimately lead to an increasingly weak U.S. dollar.
It was February 2014 when I wrote this sentence in Sovereign Investor Daily: Europe is a buy.
Since then, European shares, as measured by the Stoxx Europe 600 Index, have moved up more than 22%. The S&P 500 is up about 13%. The divergence is even wider when measured from the first of the year: European shares are up nearly 20%; American shares are barely up more than 1%.
Investors forever look to the future when they’re putting money to work. What happened yesterday is history, and what happens today is already factored into market prices. The only time frame that matters is tomorrow. And Europe’s wide lead over the U.S. this year is the sign that investors are placing their bets on the Continental economy continuing to outpace America for the foreseeable future.
That makes a lot of sense.
U.S. markets have posted huge gains nearly every year since the global financial crisis ended. Europe has lagged. But now U.S. markets are hugely overextended and face a future of muted returns while corporate earnings catch up to lofty market valuations.
In contrast, European stocks haven’t done nearly as well as the U.S. in recent years and are trading at far cheaper valuations overall. Now, they’re in catch-up mode and will spend the next several years rising while U.S. stocks languish.
Yes, Europe has its issues: Greece, Russia/Ukraine, the European Central Bank pumping more euros into the system. Yet all over the continent, bullishness is evident.
Business-activity surveys are at multi-year highs. Employment in key economies is rising faster than originally expected. Consumer and business sentiment is on the ascent. Retail sales are growing at levels not seen since well before the global financial crisis. Portugal, one of the poster children of the European debt crisis, is now reporting positive GDP growth. Greece is moving toward a primary budget surplus, despite the debt challenges it’s dealing with. The British jobs market is booming. German exports are strong, despite the hit they took from European sanctions on Russia, a significant German trading partner.
And a Citigroup measure of economic surprises among analysts and economists shows that Europe has increasingly been surprising to the upside since last fall, while the U.S. economy has been increasingly surprising to the downside since the beginning of the year.
The message: Europe was unloved and underappreciated while the U.S. was overhyped. That has been reversing since about December, and it has long way to go before it plays out.
An Alternative to Stocks
This is exactly why I began recommending European stocks to my monthly Sovereign Investor readers in the summer of 2013, starting with a Spanish company that is now up 35% and paying us a 7% dividend each year. (Spain, I said back then, was on the mend, and it is now one of the economies surprising the prognosticators.) It’s why I recommended a German retailer last fall that’s now up nearly 30%. And why I recommended a broad European ETF in late January that’s already up more than 12%.
I could see the turn coming because of my travels across the Continent in recent years. I knew that getting into the game early would produce nice returns.
Now, I see the same opportunity in currencies.
A reversal in the dollar is imminent — it’s, to use a Wall Street cliché, already baked into the cake.
For the same reason I recommended European stocks, I am now recommending currencies. You want to be using your temporarily overvalued dollars to buy undervalued currencies. That’s one of the most glaring investment opportunities today.
Don’t let this opportunity get away.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker