The stock market and economy move in sync over the medium-long term. That’s why it’s extremely important to understand the state of a nation’s/region’s economy. Is the economic data improving or deteriorating?
Let’s take a look at European economic data as of January 2018.
Germany is Europe’s economic engine.
The German unemployment rate continues to drop.
After rising in 2016, Germany’s inflation rate has stabilized just under 2%.
YoY change in Producer Prices
Like inflation, Germany’s YoY % change in Producer Prices is flat.
German businesses are extremely optimistic according to the Ifo Business Climate Index. This is worrisome, because the Ifo Index is extremely high (Ifo is cyclical in nature). Some mean reversion is to be expected.
German Industrial Production is improving.
Germany’s export-oriented economy is growing at a healthy pace. The only question is whether or not German economic data will make a short term dip. Regardless, Germany’s economic expansion shows no signs of deterioration. This is a long term bullish factor for the German stock market. Here’s DAX (German stock index).
France has the 2nd largest economy in the Eurozone after Germany.
French unemployment is slowly trending lower. Clearly the French economy is not as strong as Germany’s economy.
France’s inflation rate has bounced back throughout the second half of 2017. Overall, inflation is trending higher.
YoY % change in Producer Prices
French Producer Price growth is slowly coming down. This is weaker than the inflation rate.
French business confidence continues to rise. Notice that this is a lagging indicator vs the business cycle.
French Industrial Production is slowly trending higher.
Economic Sentiment Index
France’s ZEW Economic Sentiment Index has been completely flat throughout the second half of 2017.
French Consumer Confidence continues to trend higher.
France’s economy is improving, but it isn’t as strong as Germany’s economy. This is a medium-long term bullish factor for the French stock market. Here’s the CAC 40 (France’s stock index). Notice how the French stock market has significantly underperformed the German stock market over the past 18 years. The CAC40 hasn’t even made new all time highs!
Italy has the 3rd largest economy in the Eurozone.
Unemployment in Italy is trending lower from a high level.
Italian inflation has been falling for most of 2017. Inflation is still significantly above its 2016 lows.
Italy’s Business Confidence rose throughout 2017, but has plateaued a little in the last 3 months of 2017.
Italian Industrial Production is slowly trending higher. It is now firmly above 0% (i.e. no longer contracting).
ZEW economic sentiment index
Italy economic sentiment is trending higher after bottoming in mid-2016.
Italian Consumer Confidence is trending higher after falling in 2016.
Italy’s economy is expanding at a healthy rate. Italy’s economic recovery is better than France’s economic recovery. Here’s the FTSE MIB Index (Italy’s stock index). Notice how it is on the verge of a massive breakout.
Economic data for the UK has been impacted by large forex swings after Brexit.
The UK’s unemployment rate continues to fall. It is on par with the U.S.’ unemployment rate.
UK inflation has been on the rise since late-2015.
Unlike inflation, producer price growth in the UK has fallen a little throughout most of 2017.
Industrial Production has been on the rise over the past few months.
ZEW Economic Sentiment
Economic Sentiment in the UK fell off a cliff after Brexit and has not recovered since.
Consumer Confidence in the UK continues to fall.
YoY retail sales growth in the UK continues to fall.
The UK’s economic growth is not positive at all. There are a lot of long term bearish signs that could be Brexit related. Here’s the FTSE 100 (UK’s stock index). The chart looks very similar to the S&P 500.
The UK’s stock market will go up over the next 2-3 years regardless of the UK’s economy. It’s not possible for the UK’s economy to tank while other European stock market are rising.