The Problem for Stocks: Fewer Positive Surprises

Markets are a function of reality meeting expectations. Russ discusses why the expectations are outpacing the reality.

By virtually every metric, the U.S. and most of the major economies are accelerating for the first time in many years—and in a coordinated fashion. A further bit of good news: Unlike last year, U.S. economic expectations are improving faster than the rest of the world. During the past six months, 2018 growth expectations have risen from 2.3% to 2.7%, significantly above the post-crisis average.

However, while both hard data and expectations are improving, in recent months the latter, expectations, seem to be improving faster than the former, hard data. In other words, economic releases are no longer beating expectations as frequently or by the same magnitude as was the case in the fall.

As “beats” have slowed, economic surprise indexes have weakened. The U.S. Citi Economic Surprise Index has been slipping of late. The trend is even more evident at the global level. The Citi Major Economies (G-10) Economic Surprise Index has given up more than half the fall’s gains and is on the cusp of turning negative, i.e. more negative than positive surprises, for the first time since early last fall (see the accompanying chart).