Being bullish on Europe stocks was a fashionable trade at the beginning of 2014. But as often happens when "everyone" on Wall Street bets in one direction, the market goes in the other.
Led by a 4.8% year-to-date decline in Germany's DAX, major European markets have badly lagged their U.S. counterparts in 2014; heading into Monday's session, the S&P 500 was up 5.8% this year vs. just 0.9% for the MSCI Europe Index.
"Major indexes have slumped after modest gains earlier in the year, as uneven news turned decidedly downbeat," The WSJ reports. "Italy slipped back into recession, Germany slowed down and a Russian-backed incursion gripped Ukraine. Investors have been disappointed that the ECB has held off from the kinds of aggressive easing efforts employed by the Federal Reserve and Bank of Japan."
Related: 'Healthy’ market hit by Russia-Ukraine headlines: 'Know what you own,' Lindzon says
At the start of 2014, investors were betting on continued recovery in the European economy, which has started to flag of late, most notably in Germany. Last week's ZEW investor economic expectations index fell sharply to its lowest level since December 2012.
“The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy," ZEW reported. "Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.”
Investors betting on Europe at the start of 2014 were almost certainly also chasing momentum; the MSCI Europe Index rose 18% in 2013. Europe's disappointing performance is yet another reminder of the danger (and folly) of using rearview mirror analysis, as Lauren Lyster and I discuss in the accompanying video.
A year ago, Josh Brown, CEO of Ritholtz Wealth Management, told Yahoo Finance he was making a bullish bet on Europe, calling valuations "too compelling." Today, his firm's models are now equal- or underweight Europe (relative to the MSCI ACWI Index).
The flip side of Europe's retreat is that it's one more reason U.S. stocks have regained their stride after stumbling in mid-July. America's economy looks strong relative to Europe's and the Fed has certainly been more aggressive than counterparts at the European Central Bank. While many observers fret about the Fed's policy as being too accommodative, it's clearly been very beneficial for the U.S. stock market.
Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.
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