Domestic spending stimulated the growth of the Eurozone economy in the last quarter of 2016.
GDP grew by 0.4%, meeting expectations, and household consumption added 0.2% to the indicator. State expenditures and investments added 0.1% each.
The latest figures confirmed the strength of the region’s economic recovery, and investor confidence rose to a pre-crisis high.
Inflation rose four-fold to 2% in four months, putting pressure on the ECB to exit soft monetary policy.
However, the president of the central bank, Mario Draghi, argues that the rise in prices was due to the dynamics of energy carriers, and the internal price pressure remains sluggish.
Import surpassed exports in the fourth quarter, and trade subtracted 0.1% of GDP. Consumption of the state sector and households increased by 0.4% and investments – by 0.6%.
The growth of coefficients predicts the collapse of S&P 500
Growth or reduction of coefficients are important factors for the markets.
If the stock is traded at a price/earnings ratio (P/E) of 20, then the price 20 times exceeds the earnings per share. If the profit remains unchanged, and the price increases, the P/E ratio increases. When this phenomenon spreads throughout the market, even in the absence of growth in earnings per share, it grows.
The profit did not grow since 2011, and S&P 500 added 87% over this period.
Over the years, only P/E ratio has changed, which does not bode well.
This chart tracks P/E for S&P 500 on the 1st of January each year. The aggregate indicator almost doubled from 14.9 in 2012 to 26.7 in 2017:
Growth and reduction of coefficients are a cyclical phenomenon.
Reducing the coefficients, in the absence of growth in profits, means a sale, and if there is also a decline in profits, it can acquire dangerous proportions.
This chart tracks the percentage increase and decline in P/E since 1979. We can distinguish four periods of record growth in the coefficient, three of which, in 1987, 2000 and 2009 ended in P/E contraction and collapse:
The current period lasts already 57 months and is the longest in history.
It is difficult to say when it comes to reversal.
There are many reasons that have so far prevented it, including monetary policy of the world’s central banks and expectations about policy of the new administration in the United States.