Macro Hope Versus Micro Despair
With US and European equities showing a strange (though small) taint of un-green this morning, we thought a quick top-down versus bottom-up look at what has been going on was worthwhile. Macro-wise, US economic data has been modestly supportive with Citi's Economic Surprise Model mean-reverting as data came slighlty better than economists had predicted - though notably a weakening trend (but second derivative green shoots are back in vogue it seems). This supportive macro picture is at total odds to the bottom-up earnings picture where upward-revisions as a percentage of total revisions has plunged - as stocks make new highs. With correlations rising as managers chase performance, it is worth reflecting on the very recent ramp in outlooks as stocks levitate (and analysts flip-flop one more time) - which came first, the market or the economy?
Macro - just as in Q3 2010 (pre-Jackson Hole), economic data has outperformed its economist expectations and provided a fillip for stocks. However, stocks appear to have priced in this move (blue arrows) and much of the gains in the ECO index have come from the stronger than expected NFP and retail sales data (and you know what we think of those seasonal adjustments)...
And Micro - downward revisions have dominated (in a very similar trend to 2007-8) and just as it did then stocks kept going higher and sudden spikes in analyst upward revisions were very evident.
It seems macro 'hope' is well priced-in, micro-despair is being reverse engineered by analysts into expectations, and we all hold out breaths for Ben and Mario - as once again we wonder if the market is all-knowing or if like 2008, it got it all horribly wrong.