Same difference

3 October 2011 By Robert Cole

In stock markets, correlations are about the only thing going up. But while U.S. and EU equity indexes are moving in the same direction on more trading days, European shares have also slumped to a 20 pct discount to U.S. peers. That may overstate the security offered stateside.

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The DJStoxx 600 index of leading European shares fell 15 percent in the three months to the end of September. The S&P 500 index of U.S. shares fell 12 percent in the same period.
The correlation between the U.S. and European equity markets has risen steadily since 1997 from 0.3 to 0.75, according to Thomson Reuters data. Under this methodology, a perfect correlation carries a value of 1.
Over a similar period, forward-looking p/e ratios for stocks have fallen. European shares traded at a premium to U.S. stocks in the early 1990s and hovered at around a 10 percent discount for the 10 years to 2005. The discount is now 20 percent, not quite as wide as it was, briefly, in 2009.

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