05|09|2017

Passing the Torch | Market Thoughts | May 5, 2017

For years, the US has lead the charge in this economic expansion, albeit a meager charge. Is there reason to think that we may be passing the torch to Europe?

In recent months, much attention has been paid to Europe. In some cases, it was the French Election, or in-fighting between the UK the European Union (EU), or perhaps concerns of Turkish government actions as they serve as a gateway to European access. You can come up with any number of topics, but while all of this was happening, the European economy began to get healthy again. Let’s compare some key statistics between the EU and the US and see if the economic leadership torch is truly being passed from the US to the EU.

PMI Data

US ISM Manufacturing decreased from 57.2 to 54.8 in April. Still a strong reading, but a notable decrease from March. EU manufacturing PMI decreased as well. It moved from 56.8 to 56.7… Really.

Service PMI for the US has been a strength in recent years. In April, Services expanded from 52.5 to 53.1, ha ha! Services PMI for the EU expanded as well, 56.2 to 56.4… Really.

GDP

During the first quarter of 2017 the US economy expanded slower than average, but that is often the case for the 1st quarter. We expanded by 0.7%. Often times the sluggish 1st quarter can be attributed to a harsh winter, but not this year. EU GDP for the 1st quarter was released last week. The EU expanded at a rate of 0.5%. The US outpaced the EU, but their current pace is on the higher end of their production over the last 7 years.

Inflation

The Consumer Price Index (CPI) for the US came in at 2.0% for March. The EU while improving still lags the US in this category, coming in at 1.9% for April. So, they do not lag by much and really this is not an area that we want to lead in…

Central Banks

As the US economy has improved over recent years, the Federal Reserve Bank (FRB) has begun tightening monetary policy, albeit slow, we are on a tightening course. The European Central Bank (ECB) is still very accommodative as they are more recently emerging from a difficult economic environment.

Conclusion

These are great problems to have! The focus is on which economy is stronger, while much of the last 10 years has been spent asking the opposite! While growth is still moderate there are definitely signs of a higher acceleration pace from the EU in recent months. From an equity valuation stand point, EU equities have languished in recent years to US equities and provide a discount in comparison. Central bank policy and favorable exchange rates have helped foster a growth environment in the EU. Both of those factors remain in place to continue the recent trend in EU performance.

 

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