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Great Graphic: S&P 500 vs Euro Stoxx 600 and Exchange Rates

Summary:

S&P 500 stalled near 61.8% retracement of decline.

Dow Jones Stoxx 600 stopped at 38.2% retracement.

U.S. corporate earnings growth has been much more impressive than that of Europe.

The different performance does not appear to be a function of FX rates.

Today is an important day for equities. After a sharp sell-off earlier this month, stocks staged a recovery last week. The recovery has stalled near retracement objectives, which could be a potential turning point in the market.

The Dow Jones Stoxx 600 peaked on January 23 and dropped about 9% through February 9. Through yesterday, it recovered 38.2% of its decline, poking a little above 381.00.

The S&P 500 peaked a few days after the Stoxx 600 on January 26. It fell about around 11.8% and bottomed on February 9. At the pre-weekend high, it retraced a little more than 61.8% of its losses, but settled just below the retracement objective (~2743).

The Great Graphic shows the S&P 500 (white line) and the Stoxx 600 (yellow line) since the eve of the US 2016 election. The two-time series have been indexed to begin at 100. Over this period the S&P 500 has gained more than twice the Euro Stoxx 600 (29.4% to 13%).

Look at the period since 2009. The US economy has grown at a 2.2% average in the 2010-2017 period. Germany has grown 1.9% and France 1.3%. The S&P 500 has averaged 11.6% annual gains over the period. The Stoxx 50 (for which Germany and France account for more than 2/3 of the companies and market cap) rose by an average of 2.1% per annum.

S&P 500 earnings have grown by 9.7% a year from 2010 through 2017. Given US inflation, the earnings growth is about 8% per year in real terms. Since 1871, US average earnings growth is about 4%, or four times the economy’s real growth rate.

The companies in the Stoxx 50 have seen their revenues decline by 1.3% annually from 2010 through 2017. They managed to show positive earnings growth (0.3% per year) due to cost cutting.

The Great Financial Crisis played out differently on the Continent from the US experience. The US economy contracted in 2008 (-0.3%) and 2009 (-2.8%). The eurozone contracted in 2009 (-4.5%) and again in 2012 (-0.9%) and 2013 (-0.2%). The second contraction in the growth seems to have been sparked by the disruption spurred by the peripheral debt crisis. This may have contributed to the under-performance of European benchmarks., but there seems to be something more profound taking place as well.

Some observers suggest a weaker dollar is good for US stocks. It sounds reasonable and intuitive. The only problem is the facts. Over the 2010-2017 period, the US dollar on a trade-weighted basis rose in all but two of the years for a cumulative gain of more than 16%. On a trade-weighted basis, the euro has fallen half the time (four of eight years) for a cumulative loss of 7.8%.

SPX Index, Nov 2016 - Feb 2018

SPX Index, Nov 2016 - Feb 2018

- Click to enlarge

Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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