It’s the trade that seems to confound common sense: Everyone may be talking about Europe being in crisis while the U.S. is recovering but stocks are saying the opposite.
Worries about Greece and the falling euro may sound like a big bag of worry for investors in European stocks, but those markets are riding high.
The broader-market Euro Stoxx 600 closed its best January in 25 years and is now under 2 percent away from making seven-year highs. Meanwhile, the blue-chip Euro Stoxx 50 index gained 6.5 percent in last month. That’s downright terrific, especially when compared with the S&P 500, which lost 3.1 percent.
Of course, European stocks have been helped by European Central Bank President Mario Draghi announcing its version of QE in the form of €1.1 trillion in bond-buying quantitative easing.
But some worry that last week’s election in Greece threatens to pull the plug on Europe’s easy money party just as it was starting. The troubled country’s far-left governing Syriza party wants to stop austerity measures and like-minded parties throughout the EU—notably in Spain—are gaining strength.
In the end, though, the ECB will win the day, according to one market observer.
“The stimulus plan is going to be very positive for Europe,” said Gina Sanchez, founder of Chantico Global. “In the end, that positive sentiment is going to outweigh the negative sentiment that comes from these breakup fears.”
Sanchez, a CNBC contributor, isn’t too concerned with the new Greek prime minister, Alexis Tsiparas, causing trouble for the euro and the markets.
“Extreme leaders like that rarely can wreck their country in a few short months,” she said. “It’s largely overblown.”
What will matter is quantitative easing, Sanchez said, and she is recommending investors buy European stocks. “Quantitative easing is going to help push down borrowing costs. That, combined with a falling euro and with low oil prices, is going to be good for European earnings.”
The positive effects of quantitative easing are seen in the chart of the Euro Stoxx 50, according to the analysis done by J.C. O’Hara, chief market technician at FBN Securities.
“QE had a great influence on stocks in the U.S.,” he said. “We are moving to QE in Europe and the same thing is happening now.”
European stocks with strong sensitivity to their market have been working, as have large multinational European companies, O’Hara said. “You see that in the Euro Stoxx 600 and the Euro Stoxx 50. They are breaking out of multimonth consolidation zones. … You are seeing the rotation into Europe. These stocks are making new highs.”
Nonetheless, O’Hara recommends investors remain selective, avoiding countries like Greece, Spain and Italy for now and trying not to be too overexposed.
“There are plenty of good-looking charts out there,” he said. “I am adding exposure to select European names that are working and making new highs here.”