If you’ve heard your advisors or financial commentators on the news tout global stocks as more attractive than U.S. stocks right now, there’s a reason — at least if you’re looking at Europe.
The stock market recovery in Europe has been far slower than it has been in the U.S. The S&P 500, since its bear market low March 23, has risen around 50%. The Euro Stoxx 600 is up just 30% since its March 18 bear market low. France’s CAC 40 is up around 30% since that date and one shiner in Europe is Germany’s DAX, up around 50% sine its March low.
Here are three major reasons the U.S. market has outperformed the European market:
The NYSE FAANG-plus index, home to gigantic, innovative, cashflow-generating technology machines, is up more than 100% since March 18. FAANGs plus Microsoft (MSFT) - Get Microsoft Corporation Report, Tesla (TSLA) - Get Tesla Inc Report and Salesforce (CRM) - Get salesforce.com, inc. Report, by October 2020 ,had a combined market cap of about $7.4 trillion, comprising more than 20% of the market cap of the entire U.S. stock market. So when those stocks move up, they take the market cap-weighted S&P 500 up with them.
About 30% of the S&P 500 is weighted towards the broader technology sector. This is mostly a growth sector, heavily weighted towards long-term secular growth trends that can overpower economic headwinds.
The Euro Stoxx 600 doesn't have that benefit. The heaviest sector weighting in the index is healthcare, at just above 15%. And the Stoxx Europe 600 Health Care Index is up just 23% since March 28. Only 7% of the index is technology.
The Economic Recovery:
U.S. GDP growth, which tanked in the second quarter but has since begun rebounding monthly, will see a roughly 3.8% GDP contraction for all of 2020, according to forecasts. The economy will bounce back to the tune of about 3% in 2021, in line with the thesis of a V-shaped recovery. The U.S. economy in 2021 would see output hit a level just 1% under pre-pandemic levels.
European Union GDP is expected to fall 8.7% in 2020, according to the European Commission. Is is projected to gain about 6.1% in 2021, which will bring levels of output back to a level 3% below pre-pandemic levels. One point of comparison worth looking at would be large cap cyclical, non-tech stocks in the U.S. versus in Europe.
This brings us to the third point:
Monetary stimulus has been aggressive in both geographies, but fiscal stimulus has been more aggressive in the U.S.
In the EU, almost 30 member countries, all with different economies, economic policy principles and political agendas, have to vote on stimulus plans. In the U.S., just two parties in one country must vote. This means fiscal stimulus in the EU can take longer to get done. Meanwhile, businesses and households are losing liquidity. This gives cyclical stocks in the U.S. an advantage when it comes to near-term momentum.