Stockpile your oranges! As I sit in London writing this column on the coldest day in seven years, the thought of tropical fruits -- or tropical anything -- is appealing. As the Brexit deadline of March 29 approaches without a deal, the fear and rumor mongering has begun in earnest. Yes, I have spoken with UK residents who are planning to stockpile fruits ahead of Brexit in case there is an interruption. Obviously, as today's weather proves conclusively, the British climate is not conducive to production of such agricultural goods and thus they must be imported.
As a stock market analyst, though, I focus on numbers not nectarine-induced panic, and the fact is the UK market still sits about 15% higher than it did in the throes of real panic on Brexit Friday -- June 23, 2016. The main UK benchmark, the FTSE 100, turned in a terrible performance in 2018 -- down 12.5% -- as did every major global equity market with the exception of India. Thus far in 2019, the FTSE has mirrored the strong gains of the S&P 500 and today broke through the psychologically important 7,000 level.
So, what does that tell us about the UK economy and the prospects for growth post-Brexit? Well, almost nothing. Seriously, could you look at the disparate performance of the S&P 500 in December and January and assume the markets were giving you an accurate read on the state of the U.S. economy? I would hope not, or we all are facing a massive case of schizophrenia.
No, in today's top-down world, the equity indices are driven by macro sentiment first, a process that determines the pace of money flowing into equities. That money is then apportioned into stocks based on their size. So, bigger will tend to do better. The facts bear that out, as well.
Vanguard's U.S. large-cap ETF, (VV) , has massively outperformed its small-cap ETF, (VB) , over the trailing five-year (50.1% to 37.8%) two-year (16.9% vs. 10.4%) and six-month (-3.9% vs. -7.0%) periods. To be sure, small-caps outperformed large-caps (11.8% vs. 8.0%) in January's go-go market, but I do not believe that move is sustainable.
So, it's all about macro, and of course the largest macro player is the Fed. There is no arguing Powell's dovish tone in his press conference this week. As I am here, though, it's an opportune time to compare Powell's dovishness to that of his counterparts in the UK and continental Europe. The comparison is not even close.
Mark Carney, the Bank of England's chief, has a reputation for hawkishness burnished by his ridiculous pre-referendum "Project Fear" predictions of terrible outcomes for the UK economy in the event of a win for "Leave." None of those outcomes have yet occurred. While growth in the UK economy has slowed, unemployment sits at a cycle-low of 4.0%, and even more importantly, employment figures (which account for so-called discouraged workers) hit an all-time high in the most recent monthly data.
So, while the Bank of England may be as data-dependent as the Fed, the bottom line is that the "Carnage Carney" and his cohorts set the overnight rate here at 0.75% versus the Fed Funds target rate of 2.5%. The European Central Bank is even more dovish, with a funds target of an Animal House-inspired "zero point zero."
So, the stage is set for European equities to outperform their U.S. counterparts. The outperformance of the U.S. market has been almost laughably strong over any recent time period. Comparing the performance of Vanguard's FTSE Europe Index ETF, (VGK) , versus the U.S. S&P 500 ETF (SPY) is telling. SPY has outperformed over the one-year (-2.39% vs, -14.1%) three-year (13.9% vs. 6.7% on an annualized basis ) and five-year periods (10.8% vs. 1.9% annualized) by such large margins that it is tempting to ignore non-U.S. markets altogether.
It may be the amount of oranges and lemons I am consuming this week, but I am here to say that that outperformance is going to change. Yes, 2019 is the year in which European equities outperform those in the U.S.
Interest rates are lower -- and just as unlikely to be increased -- than they are in the U.S., and the differential in yield (VGK is yielding 3.70% vs. SPY's 1.89%) is the icing on the cake for a reallocation of funds from the U.S. to Europe.
So, give your portfolio a little European vacation and fade the January Effect rally that has swept the colonies.