French Dip, Irish Cream

French dip. In the culinary world, it’s a roast beef sandwich served au jus. In the investing world, however, it’s what folks feared when France’s composite PMI turned down in December, contracting for the second straight month. In our view, it seems a touch premature to assume a two-month negative read in one metric means a double-dip recession. But more broadly, that this is the main European story speaks to how far the eurozone has come since the debt crisis’s depths—and how muted expectations for the region still are. In our view, this paints a nice backdrop for eurozone stocks whether or not France drifts a bit.

While headlines bemoaned the potential for France to become Europe’s new “sick man,” other developments flew under the radar. Ireland officially exited its bailout program Saturday, becoming the first peripheral nation to work its way back from the brink. On Monday, three days after announcing it won’t need a second bailout, Portugal passed its latest EU/IMF evaluation with flying colors. That same day, investors tendered their final offers for one of Spain’s biggest nationalized (failed) banks, with demand reportedly through the roof. And over in Greece, Prime Minister Antonis Samaras urged EU/IMF/ECB creditors to approve a third sovereign default.

You’ll be hard pressed to find anyone who expected these outcomes after Greece, Ireland and Portugal were bailed out in 2010 and 2011. Most were sure the eurozone would splinter and descend into chaos, taking global markets with it. Few believed financial system backstops would contain the crisis. Few believed bailout facilities would buy the region time to work through its many issues. Few believed the region could weather even a single sovereign default. Yet here we are! Ireland made it, Portugal is on track, and investors are even lining up to purchase Spain’s troubled banks. Folks see opportunities in assets deemed too toxic only one year ago. And all of this progress occurred despite not one, but two Greek defaults last year. The first went off without a hitch. The second barely received notice. The third, if it happens, seems set to go similarly under the radar.

These are all surprises—happy surprises!—and a big reason why eurozone stocks are up big this year. Reality exceeded dismal expectations. Yet none of these surprises are front-page news—bad news sells, and headlines can’t spin these. Papers can’t stoke fears with headlines screaming “Ireland Back on Its Feet!” “Portugal Sees Bailout End: Recovery!” “Spanish Toxic Assets Not Toxic!” or “Greece Forecasts Surplus, Tees Up Another Orderly Default!” They need something else to rile readers.

Hence why France ruled Monday. If you can’t hoodwink readers into thinking the debt crisis still rages, might as well conjure scary images like a “two-speed eurozone” or France “holding back” the eurozone. Yet there isn’t anything unusual or alarming about one or even a handful of eurozone nations pulling back occasionally—the 17 countries don’t move in lockstep. A slow, uneven recovery is the name of the game—just as the 18-month recession was uneven. France contracted in only three of the eurozone recession’s six quarters. The country, though big, doesn’t make or break the region. The totality matters more, and a strong totality can pull the slower members along over time.

Not that France is inherently weak. Even the widely cited PMI data don’t signal disaster. PMIs aren’t the economy. They provide a handy near-term snapshot of business conditions, but they’re just surveys—limited in scope. All a reading of 47 on Markit’s “Flash France Composite Output Index” tells you is that when surveyed about new orders and ongoing activity, 47% of respondents reported growth. The survey’s keepers assume anything below 50% equals contraction, but that’s a rough estimate at best.

PMIs get lots of attention because they’re a near-immediate read, with the preliminary “flash” estimate hitting halfway through the month. Compare that with actual results, which typically hit at a one to two month lag—old news. Sometimes results match PMIs, sometimes they differ—and flash PMIs are often revised. Then, too, PMIs cover only a narrow subset of economic activity. New orders and export orders can give insight into future trade and business investment, but they aren’t a perfect signal—they don’t capture all the nuances and variables that impact the final read. Nor are one or two months terribly significant—the longer-term trends for any stat matter more. For France, most longer-term trends simply show unevenness. Maybe that unevenness does translate into a second straight GDP drop in Q4, but considering Q3 was down only -0.1%, it seems tough to argue the rug is being pulled out. It’s also worth noting France’s central bank upped its growth forecast just last week, in the wake of November’s weak PMI. That’s not to say central banks are fantastic forecasters, but it speaks to the vast array of data they consider.

For investors, what matters most is how headlines view all eurozone developments. Headlines tell you where sentiment is, and right now, headlines tell you investors miss progress in the periphery. With folks over-focused on economic drivers in one country—and taking a rather dour view—there are many underappreciated positives throughout the region. And as Ireland returns to primary debt markets and Portugal follows—and a potential third Greek default doesn’t destroy the region—there seems plenty of space for reality to provide more nice surprises.