While headlines may evoke underlying strength (despite a slowing China, underlying employment indices lagging, and rising-price concerns growing) the expectations of our elite economists has once again extrapolated, Birinyi-style, a self-sustaining recovery to infinity and beyond. Unfortunately, economic data is disappointing in the last few weeks relative to expectations as the Citi Economic Surprise Indicator drops to three-month lows. It appears to us that the economic data in the US, driven up in the (cyclical) short-term by tax cuts, fuel cost drops, and very recently the warm weather according to Morgan Stanley, is set to repeat the 2008 pattern as ECRI data did not confirm the improvement. The mean-reversion in the Citi ECO index suggests at best a significant slowing in equity performance but more likely a negative return in the three-months ahead. It would appear that our hopium-filled expectations have once again become unsustainable.
[6]
3 month performance of the S&P 500 tracks very closely with the reverting process of over-optimism and over-pessimism that is exhibited by our analyst elite. The Citi ECO index has dropped to three month lows as even good data is already priced in and our animal spirits are dashed.
[7]
Typically the ECRI and Citi ECO index track one another in a confirmatory manner. This did not happen in 2008 (and we know how that ended) and is furthermore not happening this time. With Citi ECO now rolling over, it seems perhaps ECRI was onto something.
Charts: Bloomberg