Does the market care at all about Europe?
You’d think it would since A) Europe is a huge economy and B) There have definitely been times when headlines out of Europe caused a sharp market move in one direction or another. For example, last Tuesday saw a huge late-day surge in U.S. stocks after a rumour was reported in The Guardian about a huge $2 trillion bazooka getting cooked up.
However it’s just not clear that ultimately U.S. markets have ever been too concerned.
What are they concerned with? The U.S. economy.
The evidence is pretty clear that the market’s rebound has been the result of improved economic expectations.
First, lets just recap the latest market move. After a dismal August and September, markets have been on a rocket ship since early October.
Remember, the scene was pretty grim in September. Virtually everyone was calling for a double dip, and even Bill Gross downgraded his expectations from “New Normal” (2% growth, 2% inflation) to 0% growth.
But basically since then, there’s been a pretty sharp turnaround in the view of the U.S. economy.
For example, check out the Citigroup Economic Surprise Index, which is a measure of how well the data is doing vs. expectations. As you can see, the “beats” really started coming in early August.
Citigroup Economic Surprise Index 6-Months
Here’s another chart, which makes a similar point.
It shows Q3 GDP estimates based on something that the Atlanta Fed calls “Nowcasting,” which means tracking over 100 economic indicators in real-time to see what they’re projecting for the economy.
As you can see, starting in late September, the data started projecting much-higher Q3 GDP than what was being called for earlier in the month.
Meanwhile, one of the best indicators of the economy’s performance in real time, initial claims, is clearly improving.
The 4-week moving average is now at levels not seen in years, with the exception of a brief period this spring.
Bottom line: This market hasn’t played off of Europe, and it’s not about the Fed (Operation Twist, QE3, whatever) but a clear turnaround in the fundamentals.