Is the European economy really that weak – or why do stock markets remain so far behind in the long term?

Since the beginning of the year Europe’s stock markets have been performing at least as well as their US counterparts. The balance is different over a period of several years…

In the short term it should not have attracted any attention at all. The difference in the development of the stock markets on this side of the Atlantic and on the other side. After all the Dax and Co have performed at least as well as their US counterparts since the beginning of the year. The balance is different over a period of several years.

Europe’s stock market boom, where is it?

On an annual basis it could still be attributed to special factors. Usual fluctuations, the yield difference between Europe and the USA.

Dow Jones and S&P 500 approx. plus 4 percent. EuroStoxx 50 minus 4 percent and Dax minus 6 percent. In a five-year comparison the results are already astonishing:

Dow plus 53%, S&P 500 plus 48%, Dax plus 20% and EuroStoxx plus 4%. Not a very generous yield in Euroland on an ETF basis. Considering that Signore Mario Draghi reduced interest rates to zero during this period as a competitive investment for equities.

It gets really divergent when looking at the 10-year period:

Dow Jones triples by 210%, the Dax by 143% and the EuroStoxx by 37%. If we take 2009’s lows the difference becomes even clearer. Who bets on the wrong horse?

The reasons

Of course the US has come out of the financial crisis much faster. Among other things they have taken coercive measures against their banks while in Europe they have been trying for ages to slowly neutralise the bad loans. Then there is the prospering technology and pharmaceutical industries. In Germany the automotive industry also slowed down battered by the diesel crisis and the upheaval in drive systems. We only have to look at the single-digit P/Es of the manufacturers. A clear vote of no confidence from the markets for the near future.

What could this mean for the future?

The sharp rise of the US stock markets compared to Europe’s counterparts led to a clear overvaluation of overseas assets. Both in the price/earnings ratio and in the price/book ratio. The ratio is around 1.7 in Euroland and 3.5 in “USDollarland”. This is a difference that has not existed for half a century. It would be time to close this gap again at least slightly.

Conclusion

There is a huge difference in performance between US and European stock exchanges. Partly correctly. Europeanl stock exchanges had to do without a “sugar high” such as the trumpish tax reform. But this was bought with a large increase in debt and with horrendous share buybacks. Effects that will gradually lose their impact in the future.

Of course the USA has technological advantages and Europeans prefer to produce machines and automobiles. But if we consider the lifetime of a car to be 13/14 years then 7 percent of the vehicles will end up in the scrap press in just one year. Demand and supply arise but only if you offer the right technology.

A possible catch-up process of the European markets would of course immediately trigger maculature. A further weakening of the global economy … but we’ve written enough about that already…

By Miguel Hermoso Cuesta – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=39940701
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