Equity Strategy: July 2012 Chart of the Month
The US Citi Economic Surprise Index is at levels that suggest potential inflection from a low point. While the CESI has been lower in the past (such as in mid-2011 and late 2008), there are some signs that it may be in the process of bottoming given the model's inherent mean reversion characteristic. While disappointing releases such as the June ISM figure arguably should have pushed the index down meaningfully, it did not as a result of generally lowered broad expectations.
The G10 Global CESI also looks to be near a trough. While the G10 surprise index's correlation with stock price movement is somewhat higher than the US CESI, this may reflect the impact of global growth forecasts on aggregate stock price trends. Indeed, barring the 2008-09 Great Recession period, the global CESI looks to be at a bottom if history is any guide.
Markets tend to be tied most closely to actuality relative to projections rather than in absolute terms. With reduced forecasts and the realization that most investors already are deeply worried about European economic woes, the US fiscal cliff and China's slowdown, economists and analysts have been trimming back GDP and earnings estimates, respectively. Hence, the hurdle rates have come down to a point that generates an opportunity for stock prices to appreciate rather than slide.