So much for the wisdom of markets. It’s hard to recall a time that so many smart people on Wall Street misjudged the Fed’s intentions this badly. Not only will tapering not be starting in September, it may not starting under Bernanke’s chairmanship. We will have “QE Infinity” until Bernanke or his eventual successor sees material improvement in employment.
SPOTTING OPPORTUNITIES
So, the markets get to benefit from $85 billion a month in quantitative easing for at least another several months. That’s good news for bondholders and investors in dividend-paying stocks and REITs for the short-to-medium term. But it doesn’t really change the longer-term picture. I expect the 10-year yield to bounce around in a fairly tight band of about 2.3% to 2.7%, and I expect U.S. stocks to drift choppily higher. Can you make money in a market like that? Of course, but I see better opportunities overseas.
THE EURO ZONE
Let’s take a look at Europe. As I wrote recently, Greece—the country most associated with the Eurozone crisis—looks to have finally turned a corner. As hard as this is to believe, the government is actually running a primary budget surplus, and the economy—while still shrinking—is shrinking at the slowest rate in two years.
Greece is too little to matter, of course. But the improvements there point to a general easing of crisis conditions across the continent. Not surprisingly, European equities have been outperforming their American counterparts. The return on the iShares Europe ETF (IEV) has been roughly double that of the S&P 500 since July 1.
BULLISH FACTORS
I expect Europe’s outperformance to last for at least the remainder of this yearfor several reasons.
- Continent wide, European shares are significantly cheaper than their American counterparts, particularly when you consider that European earnings have been depressed by years of crisis. By Societe Generale estimates, European stocks trade at a 36% discount to their American counterparts.
- While still bad, investor sentiment towards Europe is improving. Investors haven’t embraced European stocks yet, but they are not as repulsed by them as they were.
- The bond markets in Europe have stopped reacting to bad news. Silvio Berlusconi is under house arrest…and it barely makes the news.
ACTION TO TAKE
Overweight Europe. You can use a broad ETF like IEV, or you can choose the individual country ETFs you expect to outperform. I am still very bullish on Spanish and French stocks and recommend the iShares MSCI Spain (EWP) and iShares MSCI France (EWQ) ETFs. Plan to maintain this overweighting through early January and perhaps later. Use a stop loss appropriate for your trading style. I recommend something along the lines of a 10%-15% trailing stop.
Disclosures: Sizemore Capital is long EWP and EWQ
