It is said that a picture is worth a thousand words. As investors contemplate investments for 2014, a must-see chart is comparing Europe to the United States.
In 2013, the U. S. market has been very strong. Mean reversion is common among markets. In other words, markets that have been strong become relatively weaker, and markets that have been weak become relatively stronger.
The point is best illustrated by looking at the annotated chart comparing SPDR Dow Jones Industrial Average DIA with SPDR STOXX Europe 50 FEU going back to 2002.
As the chart shows, from 2003 to 2007, the European market outperformed the U. S. market by about 55%. During the financial crisis, mean reversion set in. The white horizontal line on the chart marks the 2009 low in the U.S. market for this cycle. Since then, the European market has significantly underperformed. The European market will have to go up by about 66% to catch up with the U. S. market.
Keep in mind, Europe has many problems. The concept of a common currency but different fiscal policies applied to countries with disparate work ethics is inherently flawed. Southern Europe has too much sovereign debt. However, the good news is that the European Central Bank (ECB) has been phenomenally successful in controlling the crisis. Fiscal policies in many European countries are taking a turn for the better and many European stocks are much cheaper than comparable stocks in the United States.
European large caps are strong players in emerging markets…Read more at MarketWatch