The Russell 3000 benchmark for the entire U.S. stock market has increased by 6.3% since October 24, while the S&P 500 has increased by 4.62%.
The MSCI World ex-U.S. index surged by more than 22%, while the pan-European Stoxx 600 was up more than 13%. This is in contrast to the U.S. stock market, which has been relatively flat.
Last week's weaker U.S. retail sales and industrial production figures have reinforced the view that the U.S. economy is slowing down, while the growth picture in Europe, Asia and various emerging markets has improved significantly.
In a research note Friday, Barclays European equity strategists highlighted that activity momentum in Europe and the U.S. is decoupling, which is “unusual.” They noted that positive data surprises in Europe, such as a rebound in PMI (purchasing managers’ index) and ZEW economic sentiment readings, contrast with negative surprises in the U.S.
The unseasonably warm weather in northern Europe and the faster-than-expected Covid-19 reopening in China have offered some relief to the European outlook, even if many economists still expect a mild recession. In the United States, data indicates a sharper slowdown but inflation has also shown signs of a sustained downward trend, leading markets to hope for an end to the Federal Reserve’s aggressive interest rate-hiking cycle.
According to Barclays strategists, in the past few months, both equities and bonds have reacted positively to early signs of disinflation and softening growth. This has reinforced the narrative that interest rates are peaking. However, the mantra that "bad news is good news for equities" no longer seems to hold true in the United States.
The rally is losing momentum in stocks, while it is picking up speed in bonds. This is starting to look like a classic recession scenario, with investors selling stocks to buy bonds.
Europe is currently in a good position, according to the British bank. Disinflation expectations are pushing yields lower, while falling energy prices and China's reopening are boosting economic sentiment and pushing up stock prices.
"At the beginning of the year, we were overweight on Europe vs. the U.S. and we continue to believe that Europe offers better value, with the potential for flows to be reallocated towards the region. Short-term, Europe also has more positive growth risks."
If the economic situation in the United States were to deteriorate further, history suggests that the decoupling between the two markets may not last long.
Stephen Isaacs, chairman of the investment committee at Alvine Capital, told CNBC on Monday that central to Europe’s resurgence versus the U.S. was the diminishing fear that energy prices would stay high, or perhaps spiral out of control. He said that this has led to increased investment in Europe, which has in turn helped to boost the economy.
This was confirmed by recent portfolio flows data released by French bank BNP Paribas, which showed that as gas prices declined, foreign investors returned to euro zone stocks in October and November for the first time since February 2022. Is pointed out that while the discussion around higher interest rates typically centers on the negative effects on economic growth, they also mean that savers are generating income.
In general, most savers can be found in places like Germany and northern Europe. According to one expert, this is due to a number of factors that people have forgotten about.
Tourism is a big plus for Europe, and European assets have been undervalued and under owned for some time. This makes Europe an attractive investment destination.
Isaacs argued that the recent growth in the performance gap between Europe and the U.S. is due to the different orientations of their respective stock markets. The U.S. market is focused on large cap growth stocks and tech, while European markets are more heavily weighted in consumer staples, financials, and other value stocks.
"I believe that in Europe, sectors like financial services still have plenty of room for growth. European banks are currently trading at big discounts to book value, so there is a lot of value to be had there."
There is growing speculation that the Federal Reserve will soon end its policy of raising interest rates, and that it may even start cutting rates by the end of the year. This is in response to sluggish economic growth and falling inflation. In contrast, the European Central Bank is expected to remain hawkish, with a terminal policy rate of 3.5-4%.
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