Bookmark this post and come back to it in 3 months. It will be useful based on that inevitable debate we’re about to have about where economy and markets are.
Thanks to the rebounding stock market, this week saw a pretty remarkable shift in sentiment, as suddenly economists left and right are hiking their GDP estimates.
To be fair, the latest data has come in fairly robust, and non-double-dippy. This is best exemplified by September retail sales, which saw growth across all categories, and lights-out car sales.
This chart tells that story: You can see how much better September was than the previous months.
If all this is giving you a bit of a case of deja-vu developing, don’t worry, it’s only natural.
A similar thing played out last year, pretty close to around the same time.
See then, in summer 2010, we saw a lot of the same growth scares that this year has seen, only less pronounced. Then Bernanke announced QE2, and it wasn’t too long until the stock market started rallying, and everyone declared that QE2 had saved the market, as the Fed’s money printing.
But what we kept pointing out at the time last year was that in addition to the Fed’s QE2, the economy really was showing signs of improvement, and coming out of the summer slump.
On September 1 2010, for example, a super-strong ISM report shocked everyone, coming as it did after a series of weak regional Fed reports. The markets jumped 2% that day.
And it wasn’t just that ISM report.
The chart below from December of 2010 from Nomura shows that their US Economic Surprise Index — which basically aggregates all the data to determine whether, on net, data is beating or missing against economic forecasts — bottomed in August of 2010, meaning that in addition to the Fed, the fundamental economic data really was improving. The rebound in the stock market in late 2010 was not just a matter of monetary stimulus.
But people like to tell stories about the economy, so even though it clearly improved after the Summer 2010 doldrums, almost everyone focused on Bernanke and QE2, and how the Fed was juicing the market.
And we’re setting ourselves up, today, for basically the same thing (potentially).
Operation Twist — which should really just be called QE3 according to Goldman — is kicking in right as the economy is showing signs of life.
In fact, here’s the brand new Citigroup Economic Surprise Index (kindly put together by Scott Barber at Reuters) showing once again a major surge off of an August-September bottom. In fact, it just went positive again.
This is real data improvement — or at least improvement against expectations, which is ultimately what matters to markets.
And yet you can be certain that if trends persist, in a few months, everyone will be talking about how the market was totally enjuiced by the Fed, and not based on any reality. So bookmark this post and come back, and realise that there’s more going on right now than the beginning of QE3/Operation Twist.