So Much for Sentiment! A Look at the Economic Surprise Index

Like Harry said yesterday, government reports don’t paint the whole economic picture.

In addition to a low labor force participation rate, real incomes are down, and household liquidity has basically dried up. So many people are missing the ugly underbelly of the economy because they’re too busy watching the stock market tick higher and higher.

But economic reports don’t look as good as they used to. In fact, this year the number of reports beating expectations has started to nosedive.

Take a look at the chart below. The top half looks at the S&P 500 since 2003. The bottom half shows the Citigroup Economic Surprise Index for the U.S.

S&P 500 and Citigroup U.S. Economic Surprise Index

The Surprise Index looks at “how much data from the past three months is beating or missing the median estimates in Bloomberg surveys,” according to Ned Davis Research.

Basically, when that red line passes through that middle area, the S&P 500 typically takes a turn. When sentiment rises, the index’s performance usually rises with it. When it falls… you get the picture. It goes on and on as sentiment reverses.

As of June 12, the index has a reading of -43.6, and it doesn’t look like it’s about to make a reverse to the positive. Annualized returns at this level are -1.53%. But who cares? The market’s hot right now! Why listen to reason as the S&P climbs higher and higher?

Reality will sink in eventually. When it does, just make sure you’re on the right side of the fence!

John Signature
John Del Vecchio
Contributing Editor

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Categories: Stocks

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.