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“There are no rules here — we’re trying to accomplish something.” – Thomas Edison
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Oil is trading higher this morning after President Biden’s planned meeting with Arab leaders was scrapped after the bombing of a hospital in Gaza which each side is blaming on the other. At the margin, the trip’s cancellation raises risks of an escalation of the conflict, hence the rise in oil prices and lower equity prices. Normally, you’d expect to see treasuries rally in a situation like this, but they’re so out of favor these days, that they’ve only managed a modest rally.
Earnings season is finally kicking into gear, and after the close, we’ll get reports from Netflix (NFLX) and Tesla (TSLA), but this morning we’ve already seen notable reports which include Morgan Stanley (MS), Procter & Gamble (PG), and Travelers (TRV). Overall, results relative to expectations have been uninspiring as just over two-thirds of companies reporting this morning have exceeded EPS forecasts while less than half topped revenue estimates.
On the economic calendar, the only reports of note this morning were Building Permits and Housing Starts. Both reports came in close to expectations with Housing Starts slightly missing forecasts while Building Permits slightly beat.
Just when you think that European stocks are going to reverse their long-term underperformance relative to the US, US stocks start outperforming again. The last six months have been a perfect example. The chart below compares the rolling six-month performance between the S&P 500 and the STOXX 600 on a dollar-adjusted basis. While the two indices performed in line with each other in the spring, once Memorial Day arrived, US stocks started to pull away, and through yesterday’s close, the S&P 500 was up over 5% in the last six months while European stocks were down over 6%.
From a longer-term perspective, this trend is nothing new. The chart below shows the rolling six-month performance spread between the S&P 500 and the STOXX 600 ($-adjusted). Over the last 20+ years, especially since the Financial Crisis, there have been multiple six-month periods where the US outperformed Europe by an even wider margin (and far fewer periods where Europe outperformed the US by a wide margin). One major exception, though, was in the six months coming out of last October’s lows though April of this year. During that six-month period, Europe outperformed the US by more than 20 percentage points, which was the widest margin of outperformance on the part of Europe relative to the US since the Financial Crisis. It didn’t last long, though, and that period was more the exception than the rule.
The above quote from Thomas Edison is something to think about when you look at the trend of US outperformance relative to Europe. Sometimes, the more ‘rules’ you have the harder it is to accomplish things, and on the issue of regulation, Europe has a much higher burden than the US.
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