This is a 5-year look at the Citigroup Economic Surprise Index, via Bloomberg.
We’ve written a lot about this index, because it’s designed to capture what may be the most important dynamic fore financial markets: The extent to which economic data is surprising (to the upside or downside) analysts. Ultimately, good news should only drive the market higher if it’s not expected, and the opposite is logically true as well.
It’s a naturally mean-reverting index, since as things get better, analysts up their economic predictions, to the extent that they get too optimistic (or at least in line) and then the index decline. So you get that yo-yo.
But here’s a stunning fact sent out by Citi’s Patrick Perret-Green:
For the past 8 weeks it has spent most of the time above 70. Indeed, it has spent more time at these levels than all the other occasions combined.
My concern is that we are getting to a point where human nature means we are due a turn. The economists will revise up, chasing their tails, just at the time that things start to tip over.
So Perret-Green sees this as bearish, that this run both in the data and in the stock market must soon get exhausted. And that may be true. But it’s simply a testament to the general disbelief at the economic/market strength, that analysts have resisted cranking up their forecasts for such a record breaking length of time.
PS: We should point out, that the index has in fact now fallen below 70.