Weak Eurozone Growth Offers Little Support for Stagnant U.S. Economy

 

Do not seek to follow in the footsteps of the wise. Instead, seek what they sought.” – Basho

 

While investors may be getting a stiff neck looking up at the recent string of new market highs, they might soon look back wistfully at that minor level of discomfort as compared to the one they experience once the market dips low enough to touch the actual economy.

Both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) topped their respective previous all-time highs last week, with the SPX extending its current winning streak into week six.

As of last Friday, the SPX has posted a nifty 26% profit year-to-date (YTD).

Meanwhile, the Nasdaq Composite (COMP) continues to have a banner year, having gained 32% YTD.

And with investors getting all wild-eyed over recent tech-candy IPOs like Twitter (TWTR) and Zulily (ZU), not to mention the chatter over Facebook’s (FB) failed courtship of new tech darling Snapchat, additional Nasdaq gains would hardly be much of a shock.

So it would seem that the economy is thriving, and all systems are go.

The problem, however, is that at the moment, Wall Street and Main Street would seem to be functioning on two different planets.

Upcoming economic data is expected to support the argument that the nation’s consumer-based economy continues its struggle to gain traction.

Next week’s key manufacturing survey, to be published by the Philadelphia Federal Reserve, is expected to show a second consecutive monthly drop in November.

Also, an upcoming report on the housing market from the same region is expected to show a drop in existing home sales, a phenomenon occurring in a number of major markets and one attributed, at least partially, to an increase in mortgage rates.

Finally, and perhaps what might serve as a strong leading indicator, the nation’s consumers are saying they intend to spend less on Christmas gifts this holiday season compared to last, at least if the most recent Gallop poll proves to be accurate.

Well, we’ll always have Paris, or at least the Eurozone to fall back on.

Or will we?

The single-monetary region finally has exited its own extended recession, and the trend has been moving towards growth for the last three months.

The problem is, the Eurozone appears to be losing whatever little momentum it may have had, which was just enough to move it out of recession territory and into marginal growth.

However, that trend appears to be slowing to a trickle, based on recent economic data from out of the region.

According to Eurostat, the official statistics agency of the European Union of which the 17-member Eurozone is a part of, the region has posted an anemic cumulative growth rate of 0.1%.

That number, while not unexpected, remains a third less than the previous quarter’s growth.

Germany, the region’s economic powerhouse, suffered a drop of more than 50% over that period, primarily due to a reduction in exports. France, another of the Eurozone’s core economies, experienced a quarterly loss as well, actually contracting by 0.1%.

One bit of light from the region was offered by, of all countries, Spain, which officially emerged from its two-year recession.

However, if weak economic numbers continue to be posted from the region, then the U.S. can hardly count on the Eurozone to help yank it out of its own slump.

Does that mean that, from an investor’s perspective, the year’s uptrend in the European bourses has played out?

Well, the logical answer is that as Wall Street goes, so goes the Eurozone equity market. This has been true for most of 2013, in any event.

So it might not be too late to catch some of the fumes of the uptrend across the Atlantic.

But it seems reasonable to assume that the Eurozone’s fragile economy will eventually cause its recent uptrend to reverse itself, falling back to the level of the stagnation exhibited by the region’s actual economy.

Which will likely be the same thing that happens to Wall Street’s own uptrend.

What The Periscope Sees

Here is a list of five Eurozone ETFs that have gained double-digits for 2013.

While none of them have quite matched the 23% year-to-date gains of the benchmark S&P 500 Index, the returns of these continental ETFs remain impressive, particularly considering how recently the conversation regarding the region centered on when, not if, the Eurozone would break up.

The following list is based on market performance as of the end of last week:

EWP — iShares MSCI Spain Index Fund, +21.84%

EWG — iShares MSCI Germany Index Fund, +20.08%

EZU — iShares MSCI EMU ETF, +18.80%

EWQ — iShares MSCI France Index Fund, +17.68%

FEZ — SPDR DJ Euro Stoxx 50 ETF, +16.76%

Prefer using options as way to leverage your portfolio? Then consider buying February 2014 calls that are two or three strikes out-of-the-money.

Though investors do pay a premium each time a call is bought, the trade-off for potential gains, especially by taking advantage of the leverage that options offer, may make the use of calls worth the price of the premium.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.