Lessons From the Eurozone’s Market Rally

Pop quiz, friends: What are the top four countries in the MSCI World Index since its most recent low three months ago?

The answer, which may surprise: The Netherlands, Italy, Austria and Germany. With returns of, wait for it, 41.7%, 41.0%, 40.0% and 39.7%, respectively, all in US dollars.^[i] Now, those numbers are flattered a bit by the dollar’s recent weakening, which adds to US investors’ overseas returns. But even in euros, all are up more than 25.0%.^[ii]

Relatedly, Germany’s Federal Statistical Office reported Friday that German GDP stagnated in Q4. Stagnation typically isn’t good news, but expectations for Germany’s economy have tanked since late summer, tied primarily to fears of natural gas shortages spurring energy rationing, blackouts and forcing the mighty chemical industry to pare back (since natural gas is a feedstock for several chemical products). Hence, should later estimates show GDP was indeed flat, it will mean Germany has—thus far—avoided the widely expected recession. When reality beats grim expectations, stocks typically climb the wall of worry.

Crucially, as those stellar returns since the low show, stocks move first. They anticipate reality beating expectations over the foreseeable future. They do not wait for confirmation that it happened. There is no all-clear signal. If you wait for one, you increase the chances of missing big returns.

To help illustrate this, we made a graph of the MSCI Germany Index in US dollars since mid-2021 (in dollars, German stocks peaked that summer). On it, we overlaid some key economic news and sentiment indicators. As you will see, stocks didn’t hesitate to price in worsening conditions, fears and forecasts. Now they are swiftly pricing in brighter-than-feared conditions.

Exhibit 1: German Stocks and Economic Sentiment

Source: FactSet, as of 1/13/2023. MSCI Germany Index return with net dividends, 6/30/2021 – 1/12/2023. News sources include Ifo, Reuters, France 24, Deutsche Welle, Forbes, Destatis, Financial Times and Reuters.

Whether October 12 proves to be the bear market’s official low, no one can say. Short-term volatility, including bear (and bull) market inflection points, is impossible to pinpoint in real time. It takes a lot more hindsight. But stocks rising fast as a so-so reality beats ultra-dour expectations is a recovery hallmark, in our view.