Blog Posts — September 7, 2018

US Steams Ahead, Europe Struggles: August Market Review

August brought the biggest outperformance for US stocks relative to European indices in nine years, as buoyant American growth contrasted with financial and economic concerns in Europe.

The STOXX® USA 900 Index gained 3.4% in the month to reach another all-time high,1 while the STOXX® Europe 600 Index retreated 2.1%.2 The returns marked the widest gap in favor of the US gauge since the current bull market started in March 2009.

The EURO STOXX 50® Index of Eurozone blue chips performed even worse, declining 3.7% in euros and swinging back to a loss for this year. The STOXX® Global 1800 Index climbed 1.2% in dollar terms, taking this year’s gain to 4.5%.

A World of Two Halves

While the US economy is pushing ahead, there are issues clouding the outlook for the rest of the world. In particular, rising US interest rates are triggering volatility in emerging economies, while President Donald Trump’s trade protectionism has cast doubts on the growth prospects for exporting nations in Europe and Asia.

On Aug. 29, the US Department of Commerce raised its estimate of US second-quarter GDP annual growth to 4.2% – the fastest rate since the third quarter of 2014 – as business and consumer spending remains strong. The unemployment rate in the country fell to 3.9% in July, nearing its lowest in 50 years.

The US and Mexico reached a deal in August to relaunch the NAFTA agreement. Yet trade worries linger: press reports said that Trump was considering tariffs on an additional $200 billion worth of Chinese products.

Positive sentiment towards US economic and corporate profits growth has lifted the STOXX USA 900 Index 9.6% so far this year. The STOXX Europe 600, meanwhile, has climbed just 0.6% and the EURO STOXX 50 is now down 0.9%.

European picture less certain

Since the start of the year some reports have signaled Europe’s economic momentum may be losing steam. The Eurozone manufacturing Purchasing Managers’ Index (PMI) compiled by IHS Markit showed in August a further slowdown in the region’s activity.

Italian bonds fell over the month amid concerns the new government may miss its budget commitments. A plunge in the Turkish lira, separately, was particularly hurtful for shares of European banks with operations in Turkey.

Emerging woes

The lira’s swings were symptomatic of broader concerns that higher US borrowing costs will hurt those developing nations most dependent on external financing. The STOXX® Emerging Markets 1500 Index dropped 1.5% in August. The STOXX® China A 900 Index retreated 5.5% in yuan. The STOXX® Turkey Total Market Index and the STOXX® Argentina Total Market Index both plummeted 29% in dollars over August.

Investors are watching reports out of China to assess the extent of a slowdown in the Asian giant and of any impact from an escalating trade conflict with the US. Reports in August showed China’s fixed-asset investment, industrial output and retail sales grew less than forecast by economists in July, Reuters reported.3

Mining companies continue to underperform

The STOXX® Global 1800 Basic Resources Index – down 7.6% in August – was the worst performer for a second consecutive month among19 supersectors in the STOXX Global 1800, amid concern the Chinese economy may be slowing down more than expected. The price of mining commodities including copper fell in the month. China is the world’s largest consumer of aluminum, copper and coal.

At the other end, the STOXX® Global 1800 Technology Index led gains with a 7% advance as investors paid up for the sector’s profits growth. In August, Apple Inc. became the first US company to top $1 trillion in market capitalization. The STOXX® Global 1800 Retail Index followed with a 6.6% advance, and the STOXX® Global 1800 Financial Services Index came in third after gaining 2.9%.

Southern Europe ends at bottom

With a 3.3% advance, the STOXX® USA Total Market Index was the second-best performer in August, in local currencies, among 23 developed markets tracked by STOXX. It was only surpassed by the STOXX® Israel Total Market Index, which climbed 3.5%.

Southern Europe took all three bottom slots in the month’s ranking. The STOXX® Italy Total Market Index tumbled 8.3%, led by banks. The STOXX® Greece Total Market Index fell 5.1% and the STOXX® Spain Total Market Index dropped 4.9%.

Investment factors perform

Pure factor investing worked well in Europe during the month. Five of the seven iSTOXX® Europe Factor Market Neutral Indices posted a positive return, while the remaining two outperformed the benchmark index. The iSTOXX Europe Factor Market Neutral Indices neutralize systematic risk by holding a short position in futures on the STOXX Europe 600.

The best performer in the group was the iSTOXX® Europe Carry Factor Market Neutral Index, with a 1.3% gain, while the iSTOXX® Europe Value Factor Market Neutral Index was the worst one after falling 0.5%. The Europe Value Factor Market Neutral Index is now down 5.3% in the year, leading losses. By contrast, the Europe Carry Factor Market Neutral Index – which tracks stocks with high growth potential based on earnings and dividends – is up 2.6% in 2018.

Featured indices

Total return in dollars after taxes.
Total return in euros after taxes.
Reuters, ‘China’s investment, retail sales miss expectations; July industrial output growth steady,’ Aug. 13, 2018.