This chart from Citi economist Steven Wieting argues that the S&P 500 might have run too far relative to improving economic data we’ve seen thus far.
U.S. stocks have frequently rebounded from troughs as U.S. industrial production improved. This is shown by the historical trend below. (The S&P 500 is in red with industrial production in blue)
Yet stocks have also frequently run too far ahead industrial production, thus falling or stalling out in future months as industrial production kept rising to ‘catch up’. Note the most recent gap between industrial production improvement and the S&P 500, shown in the right-most portion of the chart, blue vs. red.
It’s an example of how positive economic news might have already been priced-into stocks, and then some.
(Via Citi, May 2010 Chart of The Month, 5 May 2010)