What The Misery Index Tells Us About Europe

It’s no secret that most European economies have been struggling. In 2012 and 2013, Spain’s economy shrank by 1.6% and 1.3%, respectively. Italy’s shrank by 2.4% and 1.8%, respectively.
The “big three” of Germany, France and the United Kingdom were able to eke out growth … barely.
But things may be looking up for European economies after a tough stretch. At least, that’s what recent IMF data suggests. The chart below, courtesy of FactSet, shows that the IMF expects all five of these economies to post at least some growth in 2014.

misery-index Source: FactSet

Leading the recovery is the United Kingdom, which is expected to grow by 1.4% this year and by 1.9% next year. That slow growth isn’t usually something to stand up and cheer about, but in the broader context of relatively miserable growth, it would certainly be welcome.
Economic misery can actually be charted, strange though it may seem. But when the Misery Index is falling, well, who’s going to complain about the name?
The Misery Index is the sum of the inflation rate and unemployment rate. In the U.K., this index peaked two years ago at 13.3%. Today, it sits at just 10.3%, still above “normal” levels over the last decade, but a tick below the 40-year average of 13.2%.

misery-index-2Source: FactSet

With U.K. unemployment and inflation falling, consumers are opening their wallets, a trend that is helping to fend off misery in Europe’s third biggest economy. While this is great news for the U.K., it should also be welcome news for U.S. investors.
Many are wondering what will help power the stock market in 2014. If U.S. interest rates rise, that could ding stocks. Our own slow-growth economy can only do so much on its own.
In this global economy the U.K. and the rest of Europe matter more than many may realize. The fact remains that many U.S. companies will depend on Europe to fuel growth.
I recently spent a few minutes figuring out how many companies in the Dow Jones spoke specifically about Europe in their Q3 financial results. In all, 11 of 30 Dow companies provided European revenue growth figures. Eight of these reported year-over-year revenue growth.
According to FactSet, this is the highest number of Dow companies to report European growth since Q4 2011. That’s good news. Among the “growers” are Johnson & Johnson (NYSE:JNJ), Nike (NYSE:NKE), Coca-Cola (NYSE:KO) and 3M Company (NYSE:MMM). The two “losers” are Pfizer (NYSE:PFE) and Caterpillar (NYSE:CAT). Eight out of eleven isn’t exactly a large sample size, but it’s something to consider.
Among companies that I follow for subscribers to 100% Letter and Top Stock Insights, I’ve paid particular attention to how their European operations are doing. For many, things are still slow, if not contracting.
But the fact that many of these companies are growing despite Europe’s weakness is encouraging. And if the continent can actually contribute to global growth in 2014, as the IMF is expecting, then, well, we might get that little push to keep this bull market intact.

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