Special Question For Special People – Europe Or The US Can Perform Better?

in investing •  10 months ago  (edited)

0006 Europe America map595790_19201.jpg


  • JPMorgan: it’s time to switch from the U.S. to Euro-Area stocks.
  • Indeed, European indices seem to be far behind the American stock market.
  • Short US and long Europe?

Stocks buying opportunity in Europe?

JPMorgan says it’s time to switch from the U.S. to Euro-Area stocks – reported Marketwatch and Bloomberg. They are speaking about a significant “change of heart from JPMorgan equity strategists”. Because they no longer prefer US stocks to Euro-area equities.

They are also writing about tactical opportunity “opening up for Eurozone to catch up”. The stock market in the European region underperformed 20 percent in dollar terms over the past 18 months. “Close to outright cheap” – wrote JPMorgan. The investment bank expects the economy of the old continent to revive again. The new quantitative easing measures of the ECB can have their effects in some months. (Although other economists doubt it.)

Double performance of US stocks

I made a quick chart to see the longer-term picture. I draw the S&P 500 index and the German DAX from March 9, 2009, from the supposed bottom of the Lehman-crash. (I used the total return version of the S&P 500 /SPXTR/, which also contains the dividend payment yields, like the DAX.)

The S&P 500 Total Return index and the DAX German stocks index, changes in percent (Chart courtesy of Stockcharts.com)

In these ten and a half years, the S&P 500 jumped 443 percent, to reach more than five-fold level in value. (On a yearly basis, this is a turbo-yield of 17.5 percent.) The German DAX rose “only” 239 percent, to more than three times the original value. (Approximately 12.3 percent p. a.) The 13.7 percent fall of the EUR/USD currency pair makes European stocks even cheaper (see the smaller chart below).

Looking at the different P/E ratios

So far, so good. Let’s see these mentioned P/E (price/earnings) ratios. The Wall Street Journal reports the P/E of the Dow Jones Industrial Average by 19.32, NASDAQ 100 Index, 24.35, and S&P 500 Index, 23.05. The DAX index by Bloomberg has a P/E of 20.2. But on this second financial site, the S&P 500 also quotes with 19.58 P/E, lower than on the other page.

The multi-year average of the P/E ratio, the Shiller P/E or CAPE (cyclically-adjusted price-to-earnings) is on a relatively high level in the USA, by 29.2 now. (Source: Starcapital.de.) In Germany, this is only 17.2. In France, 21.0, in Great Britain, 15.8, and Italy, 19.2. Spain seems to be very cheap, with a CAPE of 13.4. (By the way, Russia has 7.2, and Turkey, 7.7.)

Are European stocks priceless?

I’m sure the CAPE indicator also has failures and critics, for example, it seems to rely very much on the past. Besides, it doesn’t consider the level of interest. Many opinions are pointing out that the high valuations of stocks can’t be interpreted independently of the historically low level of interest rates.

But in this case, European stocks would be priceless. Because the negative sovereign bond yields, theoretically, could induce infinite increases in exchange rates.

Although, we know that the underperformance of Europe, has also its special reasons. The economic growth is and was lower, the ECB began its easing measures too late. New and new political worries were on the agenda. Like the Spanish crisis, Greek crisis, Italy worries, the refugee crisis, a lot of elections…

My opinion: long and short

By my experiences, you have to take very seriously what analysts of JPMorgan say. They were often right in the past, or even, they possibly triggered the price movements themselves. Indicators also seem to underpin their opinion.

But I couldn’t sleep well only buying the stocks in this market environment. I’m considering to go long on European stocks and short some overvalued-looking American giants at the same time.

This post was published first on Turboyield.net

Disclaimer 2

I’m short on the VIX index (S&P 500 CBOE Volatility Index). I’m long on General Electric.


This website and the information contained herein is not intended to be investment advice or credit analysis. I’m not a financial advisor and I have no business relationship with any investment or finance-related company. The posted material on this blog is my personal opinion or quoted from other sources but never advice or an offer to buy or sell any product. Make your proper research, or consult your advisors before making any investment or financial or legal decisions.

(Photo: Pixabay.com)

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They are two separate markets that are not exactly comparable. The Euro Area stocks are much more services oriented and most companies have low cost access to financing. Us Stocks are more for newer products and services.
I would still put my money in the USA. The US DOllar is the global reserve currency for 96% on countries worldwide. They many not be the best player in the game, but they set the rules of the game. So I would bet on the one who writes the rules.

Maybe JPMorgan writes the rules? Maybe the gap between the valuation of US stocks and EU stocks is too big already? Maybe EU is less affected by trade war? US presidential election nearing, risks surging...
I don't know the answers, only thinking loud.

I meant more like the Federal Reserve writing the rules, as they control the money supply of the US Dollar. Yes, the effect of the ongoing trade war is just beginning to show. I think that JP Morgan may also consider the Euro to be more stable as this conflict continues.
I am also just thinking out loud.
I am enjying you blog though.

Long GE sounds like it could be painful.
This isn't financial advise.

I bought it low in December, and sold the half with gains, so I'm not complaining.

Sounds good

I would say overweight Yurop because they are lacking behind. Definitely don't short US

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Maybe some individual stocks, looking for US short ideas... Better than shorting the entire market.

I definitely subscribe to the theory of shorting specific stocks vs going long an index.
As always, I'm short on shorts and short ideas.

Wework would have been one.
Still wondering if Uber will recover.
Silly question: are any of the scooter companies already listed? They've got to be a terrible pile of burning cash.

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