Over the past year, European equity markets have confounded many observers, decoupling from macro indicators and broadly continuing to grind higher despite a significant repricing in the expected magnitude of central bank interest rate cuts. Recent economic cycles have not served as a good guide, but looking back almost three decades, we can find a cycle with uncanny similarities to today.
Specifically, in 1995, after a period of rising interest rates, Fed chair Alan Greenspan unveiled what ultimately became the ‘Fed pivot’, stating that “the Fed likely will be able to contain price increases with little difficulty”. Months later Germany’s Bundesbank — the trendsetter for European central banks at the time — also pivoted away from rate hikes and towards future cuts. European equities were already off to the races, following US stocks higher. Academic studies would later point to the period that followed as the ‘perfect soft landing’, something unforeseen at the time.
This 1995 Fed pivot and soft landing playbook can serve as an important guide to rising European stock markets today. Sure, Europe’s economic growth is lacklustre compared to the United States, but this was also the case in the mid-1990s. Germany and Italy registered close to zero GDP growth soon after the pivot.