European Stocks: “Deeper and Deeper”

Hey guys, Brian here. The new issue of the European Financial Forecast is online.

We’re getting deeper and deeper now into what we think is going to be a pretty substantial drawdown. Things still feel pretty calm, right? Stoxx 600 is only down about 10% since its all-time highs, and we’re coming up on the two-year anniversary here. Turns out, this is pretty common behavior. I went back and I looked at some of Europe’s, you know, more severe bear markets, back through the ’60s, and all of them gave opportunities, gave investors opportunities to exit with comparatively small losses.

So, I’ve got a chart that just kind of compares the current market to some of these previous bear markets, and, I think, just trying to give everyone sort of an intuitive sense as to how this kind of deceptive price action can lead to bigger selloffs.

Now last month, I showed four gauges of complacency on the part of investors. Most were at multi-month extremes. One of them was at a 3.5-year extreme. I’ve got two more of these kind of investor sentiment gauges this month. One of them essentially shows prices for default insurance on corporate bonds. Highest complacency since early 2022. The other is an index of riskier bank debt. That one has recovered the lion’s share of its losses since Swiss imploded in March. So once again, we’ve got these kind of investor sentiment gauges that are aligning well with the peaks and troughs in stocks, and I’ll get into the implications going forward.

Now, last thing I’ll mention is the ARM IPO. A lot of excitement that this IPO drought is finally over. Behind ARM came Instacart, Klaviyo — largely successful IPOs. I think the excitement is a little misplaced here. Globally, M&A deals are at the lowest in a decade, and the big deals — $10 billion or more — they are down 42% from a year ago. So, perspective matters here, and I want to give some perspective on these IPOs.

For one thing, ARM avoided London, right? They listed in New York. That’s part of a trend. I think it’s some perspective on how London is losing its influence as a financial center. The other thing, I’ve got a chart of LSE group. LSE Group owns the London Stock Exchange. We’ve been tracking the wave pattern in this stock for years, and I think we’re at another very important juncture right now.

So, enjoy the issue. Let me know what you think in the comments, and I’ll see you again soon.