Tuning out from the US presidential debate for a moment, another debate seems to be raging over in Europe. The debate between the stock market and the economy. The September German Ifo Business Survey showed a 3.2pt jump in the headline index to 109.5, a 29 month high. So if the German economy is doing so well, why is the stock market breaking from its usual habit of tracking this indicator?
While there are always going to be nuances and variables to the answer, the first point to note is that this is not the first time there has been a divergence between the series. The most notable period of under-shooting was in 2011/2012 - this was when the European debt crisis was at its worst - thus it is understandable that the market, being a discounting machine, would overshoot to the downside. By the same token, in 2000 when the global stock market mania was in full swing the market overshot to the upside as euphoric sentiment rather than pessimistic sentiment drove the direction of the market.
So it's worth pondering whether it's just sentiment driving the overshoot once again, particularly with the crisis still fresh on the mind. If this is the case, then at some point the market will start paying more attention to the economy, and with an increasingly activist ECB easing monetary policy the Euro Stoxx returns could become great again.
Bottom Line: European equities have been undershooting vs the economy, this could be just a sentiment thing that is ripe for an upside correction.