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The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
Saturday, February 25, 2017
The stealth rally in Europe continues...
You may not have noticed, but European stocks – as represented by the STOXX Europe 600 Index – broke out to a new 52-week high earlier this month.
On February 13, the broad index closed at more than 370 for the first time since December 2015... And it has remained around that level over the past two weeks. On Thursday, it closed at 372.
Our colleague Steve Sjuggerud believes further gains are likely...
Steve recently turned bullish on European stocks for the first time in years. They meet all three of his favorite investment criteria: They're cheap, they're hated, and they've started a new uptrend.
And Steve believes nearly 10 years of underperformance versus U.S. stocks means European stocks could soar triple digits as they play "catch-up" over the next few years.
Of course, nothing in the market is guaranteed. But the latest data support his bullish thesis...
This week, market-data firm IHS Markit reported that eurozone business activity soared in February.
The firm's flash composite index of services and manufacturing jumped to a better-than-expected 56 this month. That's up from 54.4 in January, and its highest level in nearly six years. (Like many similar measures, readings above 50 indicate growth, while those below 50 indicate contraction.)
The individual measures for both Germany and France – Europe's two biggest economies – came in well above expectations, too. As IHS Markit Chief Business Economist Chris Williamson noted in the accompanying release...
However, a great deal of uncertainty still lies ahead...
France's upcoming elections, in particular, promise to create volatility on par with last year's "Brexit" vote or the U.S. presidential election.
But after years of short-lived rallies based on little more than hope and central-bank stimulus, we're finally seeing signs that the European economy is improving. And that could be a massive tailwind for European stocks.
Meanwhile, here in the U.S., we could soon see another bullish signal… one that has never been wrong over more than 70 years...
The benchmark S&P 500 rose 1.8% in January, and is up roughly 3.5% so far this month. According to equity-research firm CFRA, this could bode incredibly well for the rest of the year...
The company notes that stocks have risen in both January and February just 27 times since 1945. And in every one of those years – 27 out of 27 times – the market has ended the year in green, for an average total return of 24%. That's an impressive streak.
Of course, nothing can guarantee that streak will continue... And as always, we would never recommend making investment decisions based on any one indicator alone.
But history strongly suggests that the bull market in U.S. stocks has further to run.
However, history is far less bullish about bonds...
The recent rally in stocks has been accompanied by a tightening in credit spreads – the difference in yield between U.S. corporate debt and U.S. Treasurys – but also a decline in real interest rates.
According to strategists at Bank of America Merrill Lynch, stocks and credit spreads are reflecting optimism about the economic growth and corporate fundamentals, yet falling real rates are reflecting the opposite. As Bloomberg reported this week, this is unusual...
In other words, history suggests real interest rates could quickly move higher from here... Meaning longer-duration debt (like long-dated U.S. Treasury bonds) could plunge.
One last note before we sign off...
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