If you wanted evidence that the economy and the stock market are two different things, look no further than Europe.
European stocks have surged this year. On Thursday they closed at an all-time high, even as the outlook for economic growth remains fragile and the region grapples to find a definitive way to deal with the ongoing Greek debt crisis.
Economic growth in the region is projected to reach just 1.4 per cent this year, compared with 3.1 per cent in the U.S., according to the most recent forecasts from the Organization for Economic Co-operation and Economic Development.
The Stoxx Europe 600, an index that tracks large and medium-sized companies in Europe, has surged almost 20 per cent this year. On Thursday, the index climbed 1.1 per cent to 409.15 points, surpassing the previous record of 405.50 set in March, 2000 during the technology boom.
Stocks in Europe are jumping after the European Central Bank announced an expanded 1.1 trillion euro ($1.2 billion) bond-buying program in January to boost the region’s economy. By buying government and private-sector bonds, the ECB aims to keep market interest rates low, which encourages lending and, by extension, economic growth.
The euro region, a net oil importer, is also benefiting from falling energy costs and a weakening euro.
“There are some nice tailwinds to Europe,” said W. Janet Dougherty, a global investment specialist in Chicago for JPMorgan Private Bank. They have “low rates and very low energy prices there and then added on top of that … the low euro is going to be very beneficial.”
Bond yields in Europe are at historically low levels. The yield on the 10-year benchmark German government bond, which started the year at 0.55 per cent, has fallen to just 0.16 per cent.
The combination of falling bond yields and the comparatively weak outlook for the region’s economy has also had the side effect of weakening the euro against the dollar. That gives a lift to the region’s exporters, making goods produced in Europe cheaper to overseas buyers. It should also draw tourists to the region.
The euro has fallen 12 per cent against the dollar since the start of the year. The euro is currently trading at $1.06 and many analysts expect it to fall to parity with the U.S. currency this year.