At least once a year, Wall Street strategist-types will hit the financial media outlets with the tired declaration that “now is the time to buy European stocks.”
The rationale for buying European stocks is almost always the same: valuation.
Typically, you’ll hear some version of this analysis: “European stocks trade at a substantial discount to U.S. stocks – continued strength of the U.S. economy should elevate euro-zone stock prices.”
Sounds reasonable, but, it’s never true.
And the American-centric irony that European stocks will ride the coattails of U.S. stocks and rally to new highs should not be lost on any individual investor.
That’s not to say that European stocks don’t put together decent price moves higher. Of course, they do. But you can bet that if European stocks rally, U.S. stocks are rallying more.
Here’s a gem from CNBC from back in May:
Here’s one from Goldman Sachs, circa June of 2023:
One more, from Business Insider from March 2024:
I’m not even sure why some investment banks or strategist-types continue trotting out the “European stocks as a better alternative to U.S. stocks” trope every few months. The answer is always the same: Nope, Nope and Nope.
A Simple Way to Win
Now to be fair, there have been times when European stocks have outperformed U.S. stocks…
As you can see on this chart, European stocks were the place to be exactly…
Twice over the last 20 years…hmmm…that’s…something.
You could look at the GFC years 2008-9 and the first couple years of the recovery 2011-12 and think “huh, European stocks suffered less than U.S. stocks during the crisis.” But obviously, if you were buying Europe instead of America during that time, you missed out.
Over the full decade after the GFC, American stocks did twice as well as European stocks.
10 years ago, in December of 2013, the market capitalization of the entire U.S. stock market was $16.5 trillion. That was roughly double the market capitalization of European stocks.
Today, the sum total of all U.S. stock valuations is $63 trillion. That’s almost 4 times what European stocks are worth.
I don’t know how many times Wall Street has said “buy Europe” over the last 10 years. But I do know that it’s been bad advice every single time. And I don’t see that changing.
American Exceptionalism
Innovation, rule of law, regulation, investment, education, military strength, cheap natural resources, low-cost electricity – there is a long list of reasons why the United States has the most dynamic economy in the world.
Demographics is another item you shouldn’t ignore. The U.S. is the only major economy that still has a growing population. China, Europe, Russia, and Japan are all in decline. It’s virtually impossible for a country with a shrinking population to grow consumption and spending.
That’s not to say that you can’t find investment opportunities in foreign markets. The Indian stocks Hammer recommended back in March have returned as much as 86%.
And my recommendation of Argentina’s YPF (NYSE: YPF) in March is up 75%, making it one of the best-performing oil stocks in the world this year.
Of course, each of these recommendations was made to take advantage of some special circumstances.
Special circumstances aside, the best plan of action for any investor is to ignore the talking heads who say it’s time for European stocks (or Chinese stocks) to outperform.
In 2018, Warren Buffett wrote: “For 240 years it’s been a terrible mistake to bet against America…”
Take that to the bank: sticking with U.S. stocks is the best plan of action.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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