US job growth showed continued strength for the week ending December 5th. In fact, job growth for November 2014 in the US was the highest for several years. As such, we believe the US economy remains robust and the S&P 500 hit further new highs as a result. In contrast, on the other side of the Atlantic, Mario Draghi of the European Central Bank does not plan to provide additional economic stimulus before 2015. This disappointed markets given European inflation (the rate at which prices rise) is running well below the Bank’s 2% target.
So, as the US exceeds expectations economically speaking, Europe continues to disappoint. However, long-term valuation metrics suggest that the European stock market is attractive on a long-term basis.
Research by Nobel prize winner Robert Shiller has shown that examining a country’s 10 year average stock earnings relative to current stock prices helps to predict future stock market returns.On this basis, the US market is starting to look relatively expensive relative to other global markets, whereas Europe appears good value for investors.
Crunching the numbers associated with these valuations implies that on a 15 year view the European stock market could outperform the US stock market by a median rate of +3% a year. Of course, given volatility associated with stock markets and because these are long term assessments, the markets are extremely unlikely to follow this specific pattern with any precision, but the insight that European stock markets may offer long-term value for investors appears robust in our view.
This supports our investment approach of global rebalancing. Our approach involves reducing exposure to more expensive regions, and simultaneously increasing exposure to regions where there is likely longer term valuation support, Nobel prize winning research suggests this will result in returns for you over time.
The views expressed herein are not intended to serve as a forecast, guarantee of future results, investment recommendation or offer to buy or sell securities. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results.