Key Reasons to Pay Attention to Europe

Transcript

Ken Fisher:

Always appreciate you listening to these videos. Recently in 2025, as I've been prognosticating that European stocks as a bloc would be the major world leaders in the 2025 stock market— and be relatively and absolutely strong through the course of the year. People have asked me, "Why do you have such confidence in the European economy and what drives that? And are there particular sectors or stocks that you're particularly keen on? Why?"

Well, let me just say that some of that's a little bit of a misnomer of what I'm saying. I'm particularly keen on the European stock market relative to US and, overall, the world. I'm not overly keen on the European economy. But I'm not as dour about it as most people are. Most people have looked at the European economy as a bad place now. And in reality, with stocks, it's never about whether things are good or bad. It's always about whether they end up being better or worse than people previously expected. And I believe the European economy is better than people expect because expectations have been too low. It's a pretty simple concept. If you can get it, and get away from the good and bad. And instead get into the: "Is it going to be better or worse than expectations?"

So, first you have to look at expectations. I go through a whole lot of things here. Although there are features about the economy that I do believe will make it better than people expect. But part of it is that they have such low expectations. And part of that just goes back to President Trump. Because Europeans have been afraid of President Trump from the time he got elected—partly on the tariffs, partly on concern about how he would or wouldn't support NATO. How he would handle things relative to Ukraine. All of these fears.

You take German, for example, as a language, of which that would apply to Germany, Austria, Switzerland. If you take the words in English—"tariff" and "terror"—and put them together, in Germany that's an established word—a singular word. "Tariff- terror". The fact is that Europeans have been afraid from the beginning of what President Trump would do in tariffs. And because of what's going on with the Ukraine war, and a lot of his prognostications about how that would go. And he said he'd end the war on day one when he was president— of course that's not happened. Fears. Those fears are in the stocks already.

Now, on the other hand, there are some positive things about Europe that nobody much sees. One of the points that I have made steadily all year long is not only is it that Europe's stock market would do better than the US and most other regions. Although not necessarily every single country. But also that value stocks would do better than growth stocks, and Europe is very value-stock rich. Not very growth-stock rich, which is why Europe lagged in '23 and '24. Whereas America, land of the free, home of the brave and the greatest economy in the world, is terribly growth-stock heavy. And growth stocks, and their growth-like counterparts in Telecommunication Services, constituted over 40% of the US stock market in 2024. In a period where the stocks were booming, driving the US to lead spectacularly. But now, as that sector lags and value stocks lead, that's actually where Europe is strong. And it's a reflection of some things about value.

One of them, for example— and I'm going to take you on a tangent here. I'm going to take you back to 2022 and 2021, and even the very tail end of 2020, when people would start to say —which became ubiquitous after a while—that the yield curve, the change between short-term interest rates and long-term interest rates. Where normally long-term interest rates are higher. Short-term interest rates are lower. And the curve is upward sloping. Had a long history of being predictive of economic growth. And so, as short rates were rising and long rates were staying fairly static, and it was flattening, they were talking about how it would become what's called inverted. Where short rates become above long rates. And there's a history of that turning into a recession. And of course that frightened people. And they talked about all that through 2021 and going into 2022. And we, of course, did have a minor bear market in 2022 but no recession— that which they had been envisioning would happen.

Why didn't it happen? Well, it didn't happen because markets and parts of the economy, most of the economy, are all about anticipation versus subsequent reality. And because people had been looking for it so heavily for so long, A) it was fully priced, and B) they didn't understand why it worked. In much of history, it worked in much of history when it wasn't anticipated. Because when you had a yield curve that was flattening, they didn't understand what that did in the real world. What it does in the real world is—because banks are in the core business of taking in short-term deposits as a basis for making long-term loans, when it's steeply upward sloping— 90-day Treasury bill rates against 10-year Treasury note rates. Banks that borrow short term and lend long term, which is the core business of banking and always has been, make exceptionally fat profit margins from new loans. So they keep lending and that keeps expanding and stimulating the economy, also growing the quantity of money. And that's stimulative.

But when that flattens and then inverts, banks can't make money on short-term borrowings and lending to comparable-term lenders. So they stop doing it. And when they stopped doing it, those that were dependent on those loans pull in their horns and you get recession. They didn't seem to understand the causality, but because everyone had been anticipating it, the banks had had time to adjust. Borrowers had time to adjust. Everybody had time to. You didn't get the recession.

Why am I telling you this now? That doesn't make a whole lot of sense to you, does it? Something's gone on that no one notices. And what people don't notice that generates surprise is always what's most powerful. What is that, that I'm talking about? Well, it must have something to do with the yield curve. And it doesn't have anything to do with yield curve in America, because everybody knows in the United States of America long rates are bouncing around here. The Fed's here. The spread between the two is not one. It's not upward sloping, and it's not inverted. But the central bank, our Federal Reserve, isn't going to cut short-term rates much. If anything this year, they said right now, most recently, that they won't do anything this year. They could change their mind. And of course, that's better than a year ago when it was slightly inverted.

What people haven't noticed is that a year ago in Europe, the yield curve was quite inverted. And now the yield curve in Europe has a positive upward slope. And ain't nobody talking about it, making the European bankers much more eager to lend and the lending much more helping their economy relative to what people would expect at a time when people don't expect much from the economy. You follow the benefit there?

Now there's other things. But to the part that people also wonder about: are there particular sectors or stocks? I don't like to get into particular stocks. On style, I go back to my point value should do better than growth this year in Europe and around the world. That's true and has been true this year and should continue to be so. When we look at that, that will take you then into banks heavily. It'll take you into the portions of the world that are Industrials. It'll take you a little bit more into Materials. There's parts of it that are not terribly good in a bull market, which is the purely defensive parts like Utilities. That works well in a down market. But in terms of a bull market on an upward slope—which is what I envision happening as 2025 progresses, and gets past the tariff-terror that President Trump has caused with all of his stuff in that regard that I could talk about in another video. As the bull market returns, after this —what I believe to be a—correction ends. Then those categories should lead the market. Not just in Europe, but basically around the world, including inside America. And with that, I've said my piece.

Thank you for listening to this video. I hope it's been educational for you. I hope it's useful for you. And I hope you'll listen to another video, because I always enjoy doing these for you. I hope they're helpful. I hope they're useful. Thank you so much.

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