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Euro Stocks and EU Economy: Extreme Optimism Returns

So why on earth would we recommend caution?

by Nico Isaac
Updated: April 17, 2017

This past weekend of April 14, children across the globe reveled in the joy of finding hidden Easter eggs tucked beneath chocolate bunnies. Meanwhile, a similar celebration picked up steam among those who believe the long-awaited hunt for the resurrected European economy -- and the stock market -- is finally over.

Say the bulls, after a decade of "false dawns" (The Economist) and "abortive recoveries" (Mario Draghi), the worst is now behind the markets across the pond. Really, this time it's really, really different.

Here, the following news items show how, amid a powerful Euro Stoxx 50 rally to one-year highs, optimism has officially grown from calm-and-cool -- to -- off the charts:

  • "The recovery is progressing and may now be gaining momentum. The euro area economy has evolved from being fragile and uneven into a firming, broad-based upswing." (April 6 speech by ECB President Mario Draghi)
  • "Today, almost 10 years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last underway. Since the first time since a brief rebound in 2010, all the burners are firing at once." (March 16 The Economist)

So, why in the world would we recommend caution?

Well, in our April 2017 European Financial Forecast, senior editor Brian Whitmer shows how the "eggs" of economic rebirth are more brittle than hard-boiled:

"Despite generating so much optimism, Europe's recovery has been lukewarm at best, as the top three graphs on the following chart show. After contracting at nearly 6% in early 2009, the eurozone economy is growing at just 2% today. Deflationary pressure has likewise lessened, but the Consumer Price Index has merely returned to the central bank's 2% target. Completing the trifecta, eurozone unemployment remains at 10%, after peaking above 12% in 2013..."

Next, our new European Financial Forecast points to a startling measure on the bottom of the graph that shows, "even these mildly improving statistics have come with an enormous cost... The resurgence rests on a crumbling foundation."

As for the mirrored rebound in stock market optimism, Brian presents the following chart of the Sentix Euro-area Overall Sentiment Index, a monthly survey of 4,500 private and institutional investors. In March, the index pushed above 20, the highest level of optimism in a decade!

But, as Brian explains, when it comes to such extremes in sentiment, the only thing bulls have to fear is the near absences of fear itself. Brian writes:

"To find a more optimistic reading, you would have to travel all the way back to August 2007, shortly after the Euro Stoxx 50 topped and began to nosedive 60%."

Whether history is set to repeat itself now -- our new European Financial Forecast offers his purely objective evaluation of things to come in key areas of the European economy.

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