Good Economic News Isn't Always Great News for Investors -- Ahead of the Tape
20 March 2017 - 1:29AM
Dow Jones News
By Steven Russolillo
Good news keeps coming for the U.S. economy. For contrarian
investors, this isn't exactly great news.
Consumers say they feel better about the economy than they have
in the past 17 years. Optimism among small-business owners has
surged since the election. Jobs are plentiful and wage growth is
strengthening. New data coming this week, including reports on
existing home sales, new home sales and durable goods orders,
should contribute to the positive trend.
Stocks have responded to the improving economy and President
Donald Trump's promises to cut regulations and reduce taxes. The
S&P 500 is up 11% since Election Day and hovers near its record
high. But in these heady times, it is important to remember when
markets historically perform best: Not when the economy is booming,
but rather when its performance is exceeding diminished
expectations. A good way to measure this is the Citigroup Economic
Surprise Index.
This rolling indicator measures economic data relative to
forecasts. This means that, when reports such as employment,
inflation and manufacturing are beating estimates, the index
usually moves higher. When data fall short of expectations, Citi's
indicator typically moves lower. The index, which bounces above and
below zero, has been on the upswing for months and rose to 58 last
week, a fresh three-year high.
Maintaining that trajectory won't be easy. That is because
forecasters are getting more optimistic. For instance, economists
surveyed in The Wall Street Journal's latest monthly poll now
expect economic growth of 2.4% this year and 2.5% in 2018. Both
forecasts are up from 2.2% and 2% in pre-election surveys,
respectively.
More often than not, forecasters incorrectly extrapolate recent
trends for what will take place in the future. That is typically
what prompts the surprise index to decline, with stocks often
following suit.
Since 2003, stocks perform best in the three-month period
leading up to when the Citi index hits a short-term peak. The
S&P 500 often struggles when the surprise index trends lower
from peak to trough, but then often rallies as the index turns
higher again. Citi's index had been in negative territory for much
of an 18-month stretch through last summer. Stocks were stuck in a
fairly narrow trading range over that time frame, but have risen
almost 20% as the surprise index has rallied.
Since 2011, prior peaks for the Citi index have ranged between
72 and 93. If history is a guide, then this latest uptick might
have more room to run -- an additional tailwind for stocks in the
short-run.
But the better the economy does, the more optimistic forecasters
get. That means it gets tougher for data to keep beating
expectations, which makes it harder for the Citi index to keep
rallying.
Investors should watch this space. In this age where markets
keep rallying without much opposition, this is one leading
indicator worth keeping tabs on.
Write to Steven Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
March 19, 2017 10:14 ET (14:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Citigroup (NYSE:C)
Historical Stock Chart
From Mar 2024 to Apr 2024
Citigroup (NYSE:C)
Historical Stock Chart
From Apr 2023 to Apr 2024