Morgan Stanley: We Were Just Slammed By A Wave Of Bad News, But Now It's About To Reverse

Economists and analysts tend to overshoot, both when it is time to be bullish and bearish with their forecasts.This even happens in small cycles.

Thus after experiencing a period during early 2010 when U.S. economic releases frequently beat expectations, ie. had positive surprises for the market, we just went through a period of time whereby economic data frequently missed analyst expectations, which hasn’t been kind to the stock market.

Economists were too bearish with their forecasts early in 2010, but then too bullish most recently. Thing is, as Morgan Stanley shows by the economic surprise chart below, the pendulum of analyst error may have once again swung to an extreme.

Positive economic surprises are becoming more frequent again:


Positive values for the index above indicate a high frequency of economists’ forecasts being proven too bearish by data releases, while negative values show negative values, as we’ve had recently, indicate a high frequency of economist being proven too bullish when data is released.

Note how we’ve already completed two complete cycles since March 2009, which each lasted about six months.

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(Via Morgan Stanley, Mathew Garmen, 12 July 2010)

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