More on Economic Surprises

In this week’s Weekly Market Commentary, “Breakout,” we looked at several below-the-radar breakouts in the markets and U.S. economy. While the S&P 500’s recent breakout to new highs is getting most of the attention, this month’s breakout in economic surprises was also notable. One way to measure how the U.S. economy is faring relative to expectations is the Citigroup Economic Surprise Index (CESI), which earlier this month broke above zero for the first time in 18 months.


In our weekly commentary, we highlighted the six-month period following the CESI’s break above zero as a favorable period for stocks. Specifically, the S&P 500 is up an average of 2.7%, with a median of 5.2%, in this scenario, with gains 79% of the time (14 instances) (see the table below).

The story gets better if we exclude the bear market during the financial crisis, which surprisingly saw two breakouts for the CESI into positive territory (we can all remember just how low economic expectations were during this time). Excluding the two bear market drops (December 7, 2007 and June 7, 2008), the average six-month gain for the S&P 500 is nearly 7% (with a median of 6.3%), and gains in 11 out of 12 instances. Stocks have also done well over shorter (three months) and longer (six months) periods after these CESI breakouts.


This recent strength of this more than seven-year bull market continues to surprise many, in an environment in which earnings aren’t growing, valuations are high, Treasury yields are experiencing post-WWII lows, and the U.S. economy—seven years into its expansion—continues to struggle to grow faster than 2% (as measured by real gross domestic product [GDP] growth). But expectations matter. These breakouts, with recent data hitting higher than expectations, are encouraging and may provide some near-term support for stocks.


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The economic forecasts set forth in the presentation may not develop as predicted.

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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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