Exhibit 1 shows 2022’s quarterly GDP growth rates for the eurozone, Germany, France, Spain and Italy, all adjusted for inflation (broadly rising prices across an economy). As you will see, it is pretty fair to say, in our view, things deteriorated as the year progressed.
Exhibit 1: Things Got Rough in the Eurozone
Source: FactSet, as of 31/1/2023. All figures are quarter-over-quarter, seasonally adjusted and inflation adjusted.
We also think it is fair to say most Q4 results didn’t exactly set the positive surprise board alight. In mid-January, Germany’s Federal Statistical Office estimated output was flat in Q4—it ended up contracting a bit on weak household consumption.[iv] Italy matched analyst expectations, whilst France, Spain and the eurozone overall just barely beat.[v]
Yet when we refer to reality beating expectations as being a good sign for markets (in our opinion), we aren’t talking solely about professional forecasters’ consensus estimates. We think those are but one ingredient in the broader morass of investor sentiment. And not even necessarily the most important one, in our view. We think economists’ or analysts’ expectations are sort of a niche indicator—not the sort of grandiose warnings and opinions that hog most headlines in financial publications we follow. Those headlines are important, in our view, as they often can both influence and reflect investor sentiment.
Last spring, summer and early autumn, the vast majority of European economic headlines we encountered projected sheer doom starting in Q4. Analysts and commentators we follow extrapolated high oil and natural gas prices—and talk of big shortages—forward indefinitely, predicting sky-high energy prices and severe shortages would hammer Europe hard. Shops would allegedly be forced to turn down the heat, scaring shoppers away. High fuel costs would supposedly make online shopping expensive. Some commentators we follow warned potential power rationing would risk reducing the workweek whilst natural gas shortages could take whole factories and chemical plants offline. It seemed falling GDP understated the risk.
Yet none of that has come true thus far. The region filled gas reserves well ahead of schedule and took advantage of a January warm spell to replenish reserves mid-winter.[vi] Headwinds persisted as inflation peaked later in Europe than in the US, yet the biggest economies managed slight growth or very slight contractions—all better than the severe downturns most commentators said would start materialising as 2022 closed.[vii] We think that makes the overall grinding results a relief, which is plenty to lift stocks, in our view.
Another thing to consider: In our experience, one GDP report generally doesn’t suffice to wipe away bad expectations. In reviewing coverage of Q4 numbers, we saw a lot of commentary along the lines of it looks like things didn’t go as badly as everyone thought, but there are still plenty of obstacles ahead. Some observers noted that Germany in particular could be lapsing into recession (a decline in broad economic output). Even the country’s Vice Chancellor and Economy Minister, Robert Habeck, says one looms—despite Chancellor Olaf Scholz’s claims to the contrary.[viii] Other commentators focussed on the risk of a diesel shortage reducing Europeans’ mobility, causing economic problems from here. In its updated World Economic Outlook, also out this week, the International Monetary Fund noted the eurozone’s seeming resilience but still pencilled in a sharp 2023 slowdown to 0.7% full-year growth—an anemic forecast that seemingly leaves plenty of wiggle room for a short recession at some point this year.[ix]
So it would appear the pessimism we have observed recently is beginning to thaw. But we think that means plenty of the proverbial wall of worry likely remains for stocks to climb. We think it is helpful to consider Sir John Templeton’s famous description: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”[x] Now, we think it is too soon to proclaim last June’s low the 2022 market downturn’s official low.[xi] Stocks are up nicely since then, and we are optimistic, but, in our experience, short-term moves are unpredictable, and another down leg could lurk.[xii] But for argument’s sake, if that was the low and investors have already worked through much of their pessimism, we think that would just mean we are segueing into “grow on skepticism.” In our experience, that stage can last a long time, and it is typically a very nice one for global stocks. And if it features more grinding economic data? So much the better, in our view, to keep sentiment from running too hot too fast.
[i] Source: FactSet, as of 2/2/2023. Statement based on MSCI World Index and MSCI EMU index returns with net dividends in GBP, 31/12/2022 – 1/2/2023.
[ii] Source: FactSet, as of 2/2/2023. Statement based on eurozone, Germany, France, Spain and Italy GDP.
[iii] Source: FactSet, as of 2/2/2023. Statement based on Brent Crude Oil spot prices on 8/3/2022 and 13/6/2022.
[iv] “Gross Domestic Product in the 4th Quarter of 2022 Down 0.2% on the Previous Quarter,” Destatis, 30/1/2023. “German Economy Likely Stagnated in Q4, Escaping Recession for Now,” Maria Martinez and Paul Carrel, Reuters, 13/1/2023. Accessed via Yahoo! Finance.
[v] Source: FactSet, as of 31/1/2023.
[vi] “How Much of Europe’s Gas Storage Is Full,” Staff, Reuters, 31/12/2022. Accessed via the Internet Archive. “Warm Winter in Europe Eases Natural Gas Restocking Concerns, but 2023 Still Looks Daunting,” Jacob Dick, Natural Gas Intelligence, 11/1/2023.
[vii] Source: FactSet, Eurostat and US Bureau of Labor Statistics, as of 2/2/2023. Statement based on Germany, France, Spain and Italy GDP and US Consumer Price Index and eurozone Harmonised Index of Consumer Prices. A consumer price index is a government-produced index tracking prices of commonly consumed goods and services.
[viii] “Germany Will Likely Have a Technical Recession, Habeck Says,” Kamil Kowalcze, Bloomberg, 25/1/2023. Accessed via Yahoo! News. “Germany Will Not Fall Into Recession, Scholz Tells Bloomberg TV,” Staff, Reuters, 17/1/2023. Accessed via Yahoo! News.
[ix] “World Economic Outlook Update,” International Monetary Fund, January 2023.
[x] “Bull Markets Are Born on Pessimism, Grow on Skepticism, Mature on Optimism, and Die on Euphoria,” Barry Popik, The Big Apple, 15/12/2010. A bull market is a long period of generally rising equity prices.
[xi] Source: FactSet, as of 2/2/2023. Statement based on MSCI World Index return with net dividends in GBP, 16/6/2022 – 1/2/2023.
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