Big Picture
Stocks Struggle for Traction as Investors Weigh Growth Concerns
Although they recovered a bit on Thursday, benchmark U.S. Treasury yields sank to fresh 15-month lows on Wednesday, along with German bond yields, which fell further below zero mid-week after more dovish talk from central banks.
While patience from the Federal Reserve and optimism about a U.S.-China trade deal have helped markets regain ground early this year, anxiety about slowing economic growth has renewed volatility in recent trading. Stocks fell sharply last Friday after a measure of the yield curve, the gap between short- and long-term Treasury yields, inverted for the first time in more than a decade.
Data released Thursday showed the U.S. economy slowed more than initially thought in Q4, and new data shows corporateprofit growth stalled, pointing to weak momentum at the start of 2019. GDP in Q4 grew at a 2.2% clip, revised down from an earlier estimate of 2.6%.
The Canadian dollar weakened against the greenback on Wednesday—and again Thursday–as bond yields hovered near new lows and data showed little improvement in Canada’s trade deficit. In Europe, ECB President Mario Draghi signaled Wednesday that the central bank is starting to worry about the adverse impact of negative interest rates. The ECB’s concern comes after its latest round of stimulus led to new declines in eurozone bond yields, ratcheting up the pressure on the region’s weak banks.
In the ongoing Brexit saga, Prime Minister Theresa May confirmed her lame-duck status on Wednesday by pledging to quit office if her Brexit deal was passed. Adding to the chaos, British lawmakers failed to find a majority for any alternative Brexit arrangement to May’s deal, but remain firmly opposed to leaving the bloc without one.
Markets
N.A. Markets Up Slightly
For the four days covered in this report, the Dow added 215 points to close at 25,717, the S&P 500 inched up 14 points to settle at 2,815, while the tech-heavy Nasdaq rose 26 points to close at 7,669. In Canada, the TSX was up 66 points to end at 16,155.
Equities/Strategy
Equities
Despite Wall Street touting European equities as a top contrarian play, we maintain our preference for U.S. stocks. Several high-profile U.S. investment banks have recommended buying depressed European equities not only for their relatively attractive valuations but the potential for an economic rebound in the region, too. According to these firms, the MSCI Europe Index trades at approximately 13.7x 2019 consensus earnings estimates, a six-year low. At first glance, this trade idea seems promising. However, we believe European equities’ inferior returns on invested capital (ROIC) and Europe’s weaker economic growth prospects warrant their relatively lower valuations. The aggregate ROIC of Eurozone equities lagged that of the S&P 500 -Index by roughly 10% in 2018, helping to explain European equities’ 9% discount on a price-to-earnings basis. Moreover, GPAG’s 2019 Outlook calls for European real GDP growth of 1.7%, but 2.5% growth for the United States. In our assessment, European equities are cheap for a reason.
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